The purpose of this study is to introduce a model that can analyze a business’s actual capability for growth during inflation and examine factors that could increase the capacity of Korean businesses.
During inflation, when a business reports its performance based on existing accounting methods, the cost of depreciation will be underestimated, and actual profit will be over reported, thereby making it difficult to assess the true financial status of the corporation. However, the fundamental issue is that information provided through accounting cost analysis cannot determine if the policy has actual influence on the growth of businesses and profitability. Inflation accounting or substitute accounting calculates depreciation cost based on the resupplying of production cost, allowing evaluation of whether or not current production capacity cost can be preserved regardless of inflation. Yet businesses also have to consider the extra costs incurred by expansion and changes in debt payment. An analysis therefore should be able to evaluate the overall ability of the business by incorporating productivity, sales, and loans. The funds (hereinafter “Funds”) that are actually allowed to be distributed, representing capital that would be used for business expansion and shareholdings, can be a necessary index in evaluating the actual growth and future profits of businesses regardless of inflation.
The Funds are influenced by maintenance cost followed by increases in manufacturing facility cost, actual running expenses stemming from business expansion, and increases in loans due to profits from debt borrowings. Therefore, there are many indicators such as profit rate, growth rate, depreciation rate, increase in manufacturing facility cost, business expansion cost, payout ratio, and debt-to-equity ratio that determine the Funds. Among the listed factors, an increase in manufacturing facility cost is an external variable that cannot be controlled, and the depreciation rate will be decided by corporate investment policy. But in the long term, it will be closer to the industry’s characteristics ratio. Business expansion cost, payout ratio, and debt-to-equity ratio are policy variables that are determined by management, dividend, and financial policy. Finally, profit and growth rates can be characterized by the relevant industry’s competitiveness and, in the short-term, used as strategic variables for a business. Therefore, by putting the Funds as zero (0) and other variables as independent variables, real profit or minimum growth rate can be determined.
When the above measures are applied to a specific industry, the study found several conclusions. Capital intensity industries, such as cement, steel, industrial chemical, fertilizer, and shipbuilding, are more vulnerable to inflation since the loan amount is higher than the depreciation rate. This indicates that under inflation, the debt rate can be used as a strategic management variable. It is recommended that property laws be revised so that inflation is reflected at the right time. Also, fundamentally, by implementing alternative accounting systems, businesses should try to minimize the adverse effects of corporate finance. To overcome inflation, businesses can use the debt-to-equity ratio, payout ratio, and growth rate as policy variables. In particular, the pay-out ratio has a significant impact on the amount that will be distributed, thus making it meaningful for inclusion as a policy variable.
인플레와 기업성장능력(Inflation and business growth capacity)
[서울] : 한국개발연구원
|Series Title; No||연구보고서 / 제80-02권|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Macroeconomics
Industry and Technology < Entrepreneurship
|Holding||KDI; KDI School|