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What is the impact of inflation on the valuation of business in general?

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posted Mar 20, 2016 by Raghav Choudhary

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2 Answers

0 votes

If you look at the economy as a whole nothing changes much. If its a manufacturing business, the cost of raw materials go up, cost of fuels, etc goes up. But that cost is passed on to increase in end products.

answer Mar 29, 2016 by Shekhar Yadav
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Inflation has two impact on the business. First it increases the cost of good sold (COGS) as high inflation increases the value of the following -
1. Row Material
2. Staff cost
3. Transportation
4. Financing Cost

First three points are very straight forward, now lets see the fourth point - high inflation create the pressure of the central bank to increase the interest rate to cool the inflation (high interest means people have incentive to put money in the bank in place of spending which cool down the demand side inflation) which increases the cost of financing the business.

Now coming to second, high inflation reduces the the demand of the products in general as central bank is forced to increase the interest rate which control the demand in the economy.

So in short profitability goes down of the companies in general which has impact on the companies valuations.

answer Mar 29, 2016 by Salil Agrawal
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