Gross and net investment

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The effective functioning of any enterprise depends on the correct investment policy of the management. In developing the right course, it is important to confidently operate with the concepts of gross and net investments, to understand how they affect the state of the organization and the level of trust.

In the article we will look at what gross and net investments are, what are their differences, from what sources they are formed and for what needs they are directed, and also find out what the calculated values of these indicators signal.

Investment concept

Before talking about such concepts as gross and net investments, it is necessary to define the very concept of "investment". So, investments are monetary or material investments with the aim of making a profit or other benefit. The objects of investment can be both industrial and non-productive spheres represented by he althcare, educational, and cultural organizations.

The role of investment

The role of investment in the modern economy is difficult to overestimate. They influence all spheres of society by regulating and redistributinggood. Let's consider a simple example: financial investments in a manufacturing enterprise made it possible to open a new workshop. In order to build it and lay the infrastructure, construction organizations were attracted, which allowed the latter to earn money. The new workshop needs workers, so the number of jobs has increased, the unemployment rate in the country has decreased and the well-being of the population has increased. Due to the opening of the workshop, the volume of production increased, therefore, the profit of the business entity also increased.

Workers of the new shop got the opportunity to spend the money they earned on education, culture or invest it in real estate. This example is rather arbitrary, but clearly reflects the importance of investment activity for the country's economy as a whole. Of course, the effectiveness of investments in the production sector is much easier to assess, so further we will consider investments in the microeconomic sense, that is, from the point of view of a single production enterprise.

Investment structure

It is customary to distinguish between real and financial investments. Financial investments include the acquisition of securities issued by the state or other business entity. Real investments include investments in fixed and current assets, new construction, repair of production assets, acquisition of real estate and land plots, as well as investments in intangible assets: licenses, patents, research, staff development. Thus, we gradually approachedgross investment, which is a category of real investment.

Gross investment

When it comes to gross investments, in the first place, it is real ones that are meant, but financial ones can also be classified as gross if an investor purchases shares of an enterprise during their initial issue. The funds received from the initial issue of securities are primarily used to expand production assets and intangible assets: the purchase of equipment, the lease of premises, the acquisition of a license, etc. Gross investments are investments in fixed production assets and working capital.

Composition of gross investments

Gross investment is primarily used to maintain and expand fixed capital, which includes:

• purchase, upgrade and repair equipment;
• acquisition and renovation of industrial premises;
• capital construction, including housing;
• modernization of the production process.

Gross investment is also a source of increasing working capital. First of all, we are talking about stocks of raw materials that will be needed when expanding production, for example, after opening a new workshop.

An important component of gross investment is the funds spent on the acquisition of intangible assets:

• licenses and patents;
• inventions and know-how;
• brands and trademarks;
• rights to land;
• mining rightsminerals;
• acquisition of software and software products.

The intangible assets of the enterprise also include human capital, so gross investments can be directed to staff training, medical insurance. Such investments contribute to the growth of the company's prestige in the market and indirectly affect the value of its shares.

The value of the indicator and calculation

Based on investment directions, gross investment can be divided into two groups:

• investments that go to repair and maintain existing production assets,
• investment to expand capacity.

The first group is depreciation. To accumulate this type of investment, depreciation funds are created. The volume of the fund is determined using the depreciation coefficient, which is calculated on the basis of the life of a particular type of equipment or building until it is completely worn out. The cost of the asset is transferred by the finished product, and after its sale, the pledged amounts are accumulated in the sinking fund.

The second group is represented by investments aimed at increasing capital, they are called net. These include all types of investments mentioned above, except for depreciation.

The formula for calculating gross investment is as follows:

VI=A + CHI, where

VI - gross investment;

A - depreciation;

CHI is net investment.

The ratio of gross investments and volumedepreciation indicates at what stage of development the business entity is. The growth phase is characterized by the excess of gross investment over depreciation. If the situation is reversed, this is an indicator of a lack of productive capacity.

Gross investment in the macroeconomic system can also be calculated on the basis of gross domestic product, which characterizes the total production of goods and services in the country:

VI=GDP - Rp - Rg - Rche, where

GDP - gross domestic product;

Rp - consumer spending;

Rg - government spending;

Rche - net export spending.

Sources of gross investment

The sources of the formation of the total volume of gross investments include:

• own funds of the enterprise in the form of depreciation and investment funds;
• investments of third-party investors: financial (acquisition of securities: shares, bonds, shares, etc.) and real investments in tangible and intangible assets;
• loans from banks, leasing companies and microfinance organizations;
• subsidies from the state budget.

Many enterprises are trying to attract funds from outside investors for their development. This is especially true when implementing investment projects. As a rule, the risks in them are quite high, and the company tries to diversify them by reducing the volume of its own investments and increasing third-party investments. At the same time, the organization retains fullproject control.

Public funds are involved in the implementation of major projects that are important not only for a particular business entity, but also for the country as a whole. Infrastructure projects often serve as an example of public-private partnership. There are also cases of state investment of rights to land plots and mineral deposits. Situations where entire state-owned enterprises act as investments deserve special mention.

Net investment

Net investment is the part of gross investment that is used to expand the production potential of the enterprise and increase capital. Net investment equals the difference between gross investment and depreciation.

The indicator of net investment is important in assessing the state of the enterprise. A positive value of the indicator means that the company is in the phase of growth, develops and expands. A zero value indicates a simple reproduction of fixed assets. A negative value indicates that the company does not even have enough funds to renew production assets, the organization is in a state of crisis and has a real risk of bankruptcy.

Sources

Sources of net investments are similar to gross and are divided into own funds of the enterprise, net private investment and borrowed funds from banks, leasing and microfinance organizations. The main internal source is profit from the sale of goods and services and the authorizedcapital. In addition, internal resources include profit from the sale of unnecessary, already depreciated property. The indicator of the volume of net investments from internal sources is an indicator of the stability of the organization. It affects the level of confidence in the enterprise of third-party investors and credit institutions.

Value for the economy

Net investment refers to real investment, the purpose of which is to expand production and ultimately increase profits. The net present value of investments affects not only the stability of a particular enterprise, but also affects related industries in the country: from construction to he althcare, education and culture. Thus, investment activity contributes to the development of the country's economy as a whole and the growth of the welfare of the population.

Decrease in the value of net investment signals the beginning of a recession in the economy and the approach of the crisis. The level of investor confidence is declining, and they are shifting investments from real to financial, which generally aggravates the situation. Thus, the work of bringing the country out of the crisis falls on the shoulders of the state.

Investments play an important role in ensuring the stable development of both a particular organization and the country's economy as a whole. Gross investments refer to real investments and are directed to the reproduction and increase of fixed and current assets, as well as intangible assets. Gross investment consists of depreciation and net investment. Net investment is the partinvestments that go to the expansion and modernization of production, the acquisition of patents and licenses, research and staff development. The volume of net investment is an indicator of the stability of the enterprise and affects the level of confidence of external investors and credit institutions.