There are three components of the financial depth and economic growth formula. These include; income, assets and liabilities. With the first two, it is easy to see why it matters. With the third however, we have to ask ourselves if the government is doing enough to support the economy with the appropriate programs or simply allow it to weather the storm of economic instability. This is a question that should be asked of every politician and their advisors. This piece will look at how income and assets are being measured and what impact this has on the overall health and strength of the economy.
The concept of financial depth is used to determine the health and performance of the economy. For starters, a solid financial system is important for any healthy economy. That means that there should be a regular flow of income. It also means that the financial system should be growing and expanding at an acceptable rate. At the same time, the market should be contracting or expanding in a reasonable manner.
Asset measurement is the process of determining the value of the assets of an enterprise. In order to do this, the balance sheet must be prepared in the correct format. Some managers may choose to prepare their balance sheet the way they want it and ignore the importance of the other elements. When those managers start looking for investments that will make them money instead of money that will save them money, they could hurt the economy.
In addition, the total assets of an enterprise are only as good as the amount of cash that is invested in that enterprise. Of course, many small businesses exist today where there is significant reinvestment of cash within the operations. That is important to remember. However, it does not mean that all small businesses are safe.
Also, other elements of the financial depth and economic growth equation are important to consider. For example, a company's debt to equity ration must be looked at closely. If the ratio is too high, it could mean that there is an economic lag in the overall growth picture of the business.
Another element of the financial depth and economic growth equation that should be examined closely is the operating profit margin. All businesses should be able to calculate their profit margin before looking into the balance sheet. If the margin is too low, the company may have financial problems. This is especially true in the current economic environment. Of course, there are businesses that cannot operate with a negative margin.
One final element of the financial depth and economic growth equation is asset allocation. In today's economic climate, it has become more difficult to allocate assets to bring about maximum economic growth. Instead, companies must work harder to manage their assets and spend more of their income on the things that generate the most return. This approach should include both long-term assets and short-term assets.
As a final thought, it should be pointed out that the financial depth and economic growth equation are not a fixed concept. It can be adjusted to take into account current market conditions, market outlooks for the future, . . . . . . and even company history. Thus, a company that has a good financial depth and economic depth is one that will be able to continually grow as the market needs it. Additionally, a company that has a strong balance sheet will be able to withstand fluctuations in commodity prices and other economic factors that could have a major impact on its bottom line. As always, a company's management team will need to take a close look at all of these aspects when formulating a balance sheet analysis.