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There is a common misunderstanding about capital investment: Many consider it to be the cash used to acquire plant, property, and equipment.
While this is true, it understates the scope of capital investment, which also covers R&D expenditure and even software purchases and upgrades.
Capital investment is a broad term. DealRoom plays a host to capital investments of all sizes and in this article, we explore it further.
According to GAAP, capital investment is an investment in an asset that provides benefits to the acquirer over multiple time periods (i.e. an investment in any long-term asset). This means that the term capital investment covers everything from fixing a roof to acquiring a new SAAS system to replacing a company’s fleet of vehicles.
As such an all-encompassing category, capital investments are relevant to almost literally any company at any stage of its development. There may be exceptions, but they are truly rare.
Whether it’s a startup looking to buy more computers or a mature company looking to replace outdated machinery, capital investments are necessary.
There is no minimum or maximum level of capital investment. If the company is seeking outside funding for capital investment, the lender will inevitably look at the company’s balance sheet and their ability to repay before extending a loan.
Most capital investments are made on the basis of the Net Present Value (NPV) decision. If a capital investment passes this metric, most companies will tend to favorably look at capital investment.
The motives for capital investment will differ among companies at various stages of their development. Below, we look at some motive examples:
Typically with low cash resources, startup firms look for startup financing, which usually involves some form of capital investment (technology investments, hardware, software, and/or equipment). Later on, as these companies grow and seek Series A-D investments, capital investments may be required for improving technology (for example, moving away from Beta versions of software) or growing office spaces.
Mergers and acquisitions are a form of capital investment, where the acquirer takes on the assets of the target company - thus benefitting from them over several periods - for an agreed fee. Note that the most common method of valuing a capital investment in M&A is the DCF method.
Capital-intensive businesses (the most extreme example of which are utility companies) are textbook examples of companies that make capital investments. Utility companies typically have a level of debt of 2-3x their equity, as they’ve taken on outside funding to fund their large capital investment requirements.
In April 2022, e-commerce giant Amazon announced that it would make $1 billion of capital investments in warehouse technologies for its fulfillment centers.
Amazon’s fulfillment centers are already among the most technologically advanced in the world, so this $1 billion investment amounts to an effort to update the technology and maintain Amazon’s competitive positioning.
Amazon said that the technologies would focus on speeding up deliveries to customers and improving the safety of workers in its fulfillment centers.
Capital investments are an unavoidable part of business growth. Therefore, as with any investment, it’s important to make the right ones, at the right price, and at the right time.
DealRoom works with companies that make several capital investments every year, providing them with the tools to make the right decisions when confronted with a range of options. Talk to us today about the difference we can make to your capital investments.
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There is a common misunderstanding about capital investment: Many consider it to be the cash used to acquire plant, property, and equipment.
While this is true, it understates the scope of capital investment, which also covers R&D expenditure and even software purchases and upgrades.
Capital investment is a broad term. DealRoom plays a host to capital investments of all sizes and in this article, we explore it further.
According to GAAP, capital investment is an investment in an asset that provides benefits to the acquirer over multiple time periods (i.e. an investment in any long-term asset). This means that the term capital investment covers everything from fixing a roof to acquiring a new SAAS system to replacing a company’s fleet of vehicles.
As such an all-encompassing category, capital investments are relevant to almost literally any company at any stage of its development. There may be exceptions, but they are truly rare.
Whether it’s a startup looking to buy more computers or a mature company looking to replace outdated machinery, capital investments are necessary.
There is no minimum or maximum level of capital investment. If the company is seeking outside funding for capital investment, the lender will inevitably look at the company’s balance sheet and their ability to repay before extending a loan.
Most capital investments are made on the basis of the Net Present Value (NPV) decision. If a capital investment passes this metric, most companies will tend to favorably look at capital investment.
The motives for capital investment will differ among companies at various stages of their development. Below, we look at some motive examples:
Typically with low cash resources, startup firms look for startup financing, which usually involves some form of capital investment (technology investments, hardware, software, and/or equipment). Later on, as these companies grow and seek Series A-D investments, capital investments may be required for improving technology (for example, moving away from Beta versions of software) or growing office spaces.
Mergers and acquisitions are a form of capital investment, where the acquirer takes on the assets of the target company - thus benefitting from them over several periods - for an agreed fee. Note that the most common method of valuing a capital investment in M&A is the DCF method.
Capital-intensive businesses (the most extreme example of which are utility companies) are textbook examples of companies that make capital investments. Utility companies typically have a level of debt of 2-3x their equity, as they’ve taken on outside funding to fund their large capital investment requirements.
In April 2022, e-commerce giant Amazon announced that it would make $1 billion of capital investments in warehouse technologies for its fulfillment centers.
Amazon’s fulfillment centers are already among the most technologically advanced in the world, so this $1 billion investment amounts to an effort to update the technology and maintain Amazon’s competitive positioning.
Amazon said that the technologies would focus on speeding up deliveries to customers and improving the safety of workers in its fulfillment centers.
Capital investments are an unavoidable part of business growth. Therefore, as with any investment, it’s important to make the right ones, at the right price, and at the right time.
DealRoom works with companies that make several capital investments every year, providing them with the tools to make the right decisions when confronted with a range of options. Talk to us today about the difference we can make to your capital investments.
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