Company's Financial Accounting
Company's Growth Indicators
Coefficients: Turnover and value added
Indicator: Turnover (in Finnish, liikevaihto)
In order to calculate the percentage change (growth) in turnover and value added we need the data from Income Statement for different period. Let’s consider hypothetical company X.
The change in turnover may be calculated as following:
According to our result we can conclude, that in the year 2019 our business has been constantly developed and showed the growth in turnover in 11,1 percent compared to the previous year.
Indicator: Value added (in Finnish, arvonlisäys, jalostusarvo)
The value added (in Finnish, arvonlisäys, jalostusarvo) refers to the increase in the value of production as a result of the production process, it reflects the value added by the enterprise through its own activities. Value added is an additional value of product or service created over its initial value by а producer. Thus, the value can be added in many different ways: for example, to a product or service, process or the whole business, the value can be increased also by providing some additional service or product improving.
The value added is a good indicator of productivity, that is why it is good to follow up this coefficient. The most important measure of productivity is the value added in relation to the number of employees. When we talk about the added value, it is making more sense to monitor EBITDA and personnel costs. The added value should change at the same pace as the turnover and preferably better. The relative share of value added in turnover varies between industries.
The value added can be calculated as following:
Value added = EBITDA + Staff expenses
EBITDA = earnings before interest, tax, depreciation and amortization.
In our example we have for year 2019:
- EBITDA = Net Income + Interest + Taxes + Depreciation = 28 + 4 + 8 + 10 = 50 (year 2019)
- EBITDA = Operating Profit (EBIT) + Depreciation = 40 + 10 = 50
In our example we have for year 2018:
- EBITDA = Net Income + Interest + Taxes + Depreciation = 19 + 2 + 4 + 14 = 39 (year 2018)
- EBITDA = Operating Profit (EBIT) + Depreciation = 25 + 14 = 39
Value added for two years:
- Value added = 50 + 70 = 120 (year 2019)
- Value added = 39 + 55 = 94 (year 2018)
The change in value added % can be calculated as following:
According to our calculations we have the growth in value added in 27,7 percent. The growth of the value added depends on the industry. The added value increasing usually means better profitability and operational efficiency. Nevertheless, as a general rule, the more services are associated with the product, the higher the value added. When checking this figure, it is good to remember that even though the aim is to increase the added value, even a small added value can be a great success.
If the rental expenses have not been obtained from the notes to the financial statements or in the financial statement itself, the indicator is usually calculated without the addition of the rental expenses. In our case we have also rental expenses in our income statement, so we can calculate added value taking into account rental costs and using the following formula:
Value added = EBITDA + Staff expenses + Rent expenses
Value added = 50 + 70 + 60 = 180 (year 2019)
Value added = 39 + 55 + 50 = 144 (year 2018)
According to our calculations we have got the growth in value added in 25 percent.
The growth can also be measured by the increase in the number of products produced and sold, the number of customers or the number of employees.