Investment coverage
The investment coverage (of fixed assets ) denotes an investment sbezogene business code that are used in the financial statement analysis is used. It is an indicator of the growth or contraction of a company .
calculation
Investment coverage = net investments in property, plant and equipment / scheduled depreciation for the financial year on property, plant and equipment
Net fixed asset investment = fixed asset investment - disposal at book value; Disposal of tangible assets at book value = book value of tangible assets as of 1.1. + Additions - Annual depreciation - Book value of tangible assets as of December 31 This figure corresponds to the reciprocal of the growth rate.
interpretation
An investment coverage ratio shows whether the investments are sufficient to offset the depreciation-related depreciation within a period. An investment coverage rate below 100% means an underinvestment in the observed period. The key figure only becomes meaningful when viewed over several years, as irregular investments are possible. A one-year approach would lead to a clear distortion here. If the investment coverage rate (long-term) is above 1 (100%), one can speak of a capacity expansion within the company.
Criticism or expressiveness problems
Even with an analysis over several periods, the key figure is subject to endogenous bias.
- Price level: Depreciation is derived from historical purchase prices , but investments are taken into account at current prices. This results in a blurring that becomes more apparent the higher the (average) inflation rate in the observation period. The longer the useful life of property, plant and equipment, the greater the likelihood that it will be distorted.
- Technical progress: Due to technological change, it is possible that the same production capacities are possible through lower investments. This way, the same work can be done with less financial outlay. If this fact is not taken into account, the pure analysis of the investment coverage ratio paints a more negative picture than would correspond to reality.
- Leasing : If new investments are made through leasing contracts, leasing expenses are incurred instead of depreciation. Since, on the one hand, the leased property, plant and equipment do not appear on the assets side of the balance sheet (and are therefore not depreciated), on the other hand, leasing expenses are incurred (in the income statement), the informative value of the key figure is reduced.