Notes On Growth

Module 8 Notes
Growth

Companies need adequate assets to grow. If a company is effective, its investing activities will increase its income as it reinvests profits in additional assets. Poor or ineffective investment decisions could ultimately result in negative growth or failure of the company.

Fixed Costs and Earnings

Investment in assets depends on the type of business a company conducts. Manufacturing companies generally have more invested in fixed assets because they need specialized equipment as opposed to merchandising companies that resell products manufactured by someone else.

Higher fixed costs may make expenses more predictable but this doesn’t guarantee that the earnings will be more reliable. It would depend on the company’s financial leverage. Companies with a higher proportion of fixed costs often have greater operating leverage and more predictable expenses with greater potential for high profits than a company with a lower proportion of fixed costs. High fixed costs would result in higher profits if a company experiences high sales and growth. But this would not be true for one with low sales or diminished growth, where fixed costs remain high.
Exposure to changing conditions in a poor economy can make an otherwise good investment “high risk.” Airlines traditionally are very much exposed to changing economic conditions. If a recession would take place, the airlines are one of the first sectors to be affected.
Assets and Property

Investing activities increase company value when the company uses assets to generate higher profits. Investing activities can also decrease company value if assets do not create profit. Some companies have a larger portion of total assets invested in property, plant, and equipment than other companies that have just a small portion of assets in the same manner because not all companies sell or produce the same product. If a company is a manufacturing company then the company will require large plants and equipment to produce its products, while a company that doesn’t require large plant and equipment assets to conduct business will not have large portions of its total assets invested in property, plant, and equipment.

Investment in assets depends on the type of business a company conducts. Manufacturing companies generally have more invested in fixed assets because they need specialized equipment as opposed to merchandising companies that resell products manufactured by someone else. Some companies invest heavily in equipment and a plant facility due to the fact they use that equipment for operating activities. Airlines, farmers, and other similar groups would have a large portion of its assets invested in plant facilities and equipment.

Investing and Value

A firm can increase its effectiveness if it can find a way to increase sales through better use of existing assets. If a company’s sales grow faster than its costs, the company is more effective. Investing is instrumental in determining the value of a company. If a company has a lot invested in assets and earns high profits or has a high operating leverage and high profits then the company’s value will be high, but if the same company with high operating leverage doesn’t have any profit then the company’s value will be low.

If the investing activities generate revenues, it enhances the company’s existing products. The company can then expand and grow faster than if it didn't make the investments. If the investments are good, the company will experience high growth in the rest of the

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