The subject of this article will be net investment: formula, concept, structure and other features. We will consider how such investments differ from all others, and why they are considered one of the main driving forces of economic development.
About real investment
To make it clearer what net investment is, you need to consider the concept of gross investment. The latter mean all the funds that are invested in supporting or expanding production. This includes both recovery and net investment.
Gross investment in turn, refer to the real. These funds are invested in the construction of premises, the purchase of equipment, the purchase of inventories, intangible assets, including employee training and research and development. The structure of investments of this type is the ratio between investments in fixed and working capital, as well as intangible assets.
There are also financial investments when funds are placed on bank deposits or sent to purchase foreign currency, securities, and precious metals.
Gross investment
Each enterprise requires the means of production for normal functioning: buildings and structures, equipment, materials, etc. Over time, all this wears out and becomes obsolete. To maintain production at least at the current level, companies need to make investments.
For example, a machine is broken or hopelessly outdated. The company buys a new one, but already at the acquisition stage it understands that the time will come when this equipment will have to be replaced. Therefore, the company begins to regularly write off part of the cost of the machine for depreciation. And by the time the need for a new one arises, this does not come as a surprise, as the amount of money will be generated to replace the machine.
Also, in the process of work, repair of buildings and equipment, replacement of components is constantly carried out. This is also a recovery investment.
But the time comes when a decision is made to expand production, and it becomes clear that one machine is not enough, which means that for this purpose something else is needed, other than depreciation. Additional funds required - net investment.
Net investment
As is clear from the above, the difference between gross investments and depreciation charges is net investment. The definition formula looks like this: gross investment for the business period minus the amount of depreciation for the same period.
You can also simply calculate the amount of net investment by finding out how much money for a certain period has been allocated to fixed assets, construction and stocks.
Ideally, if the economic and political situation in the country is stable, net investment is an important factor in the development of production and the growth of wealth. There is a concept of the “multiplier effect” when, as a result of the growth of net investment, incomes increase rapidly, and the growth of the latter is several times higher than the rate of investment.
The structure and volume of investment
The result, which is obtained after deducting depreciation from the gross investment, allows us to conclude about the current level and pace of development.
If the net investment is positive, then the potential of the enterprise is used to the maximum and there is an increase in production. If it is negative, then the company works worse than it could, and its performance is falling.
Net investment may turn out to be zero. In this case, we can talk about both stability and stagnation. For an unambiguous conclusion, it is necessary to analyze other indicators.
Equally important is a well-formed investment structure. That is, you need to clearly determine for what purposes to direct the funds, because investments must be effective and profitable.
Sources of Net Investment
For any investment, funds are needed. Where to find money for new investments? There are three sources:
- own funds;
- involved funds;
- borrowed funds.
Own funds are depreciation deductions and enterprise profits. It may also be the funds of the founders. Attracted capital represents the proceeds from the sale of shares and share contributions.
Borrowed funds - These are bank loans and bonded loans. The method is good if the company is solvent, and credit funds are provided at a reasonable percentage. If the expected profit is less than the cost of borrowed money, then use this method to finance investments is not worth it.
What determines the volume of net investment
According to the sources of investments listed above, it is obvious that it is not always possible to make net investments in the desired volume.
For example, the amount of depreciation may not exceed a certain rate. Profit also does not always guarantee the possibility of high investment, because sometimes it is negative. With the limited borrowed funds, everything is clear: the prohibitive loan rate will seriously reduce the return on investment.
There are other factors. For example, the degree of stability of the economic and political systems: the less confidence in the future, the less investors will have to spend money on objects whose prospects cannot be calculated.
The inflation rate is also important. If it is clear that as a result of price increases, part of the return on investment will burn out, the company will postpone the issue of investments until better times. As well as there is no economic feasibility in high investments, if the tax system in the country involves the transfer of a significant part of the profits to the state budget.
Now we know that the net investment refers to that part of the gross investment that remains after deducting depreciation.
