Intangible Assets and Capital Allocation
Capital expenditures are the amount of money a company invests into its operations to sustain and grow its business. It can be divided into
two separate areas.
Maintenance expenditures are made to maintain the
company’s current operations. They are the ordinary operating expenses a company inccurs to sustain its business. They tend to be fairly predictable in nature.
Growth expenditures are not necessary to the current
operation of the company but are made to help grow the business in the future. (read intangible assets). Growth Capex then, is the deployment of capital for the purposes of generating organic growth. It is discretionary spending that will demonstrate senior management's ability to invest for the future growth of the business.
Since it can be difficult to breakdown a companies capital expenditures, Its often best to just focus on the way senior management are allocating their discretionary capital.
Management is usually thinking strategically when they make investing decisions involving their advertising and marketing budgets thus increasing the companies scope and influence in their industry. Research and development spending often mean sacrificing the street's quarterly earning targets in return for increased revenue growth in the future. Putting money aside for major merger and acquisitions targets can alter the strategic direction of a firm and enhance investor return in the long run. Share repurchase and dividend decisions again involve thinking in terms of years instead of months (quarterly earnings). Good luck finding any of these intangible assets on the balance sheet.
Capital spending in R&D as a percentage of sales, is increasing every year reflecting the shift in the underlying economy. M&A is the largest use of capital period. This isn't monopoly money we're talking about. The capital allocation skills of senior management is crucial to the long term success of the firm.
The capital allocation ability of management can be further observed by reading the bios of senior management. How have they handled managing investments in the past? Effective capital allocation involves a different skill set than what is required from operating the company on day to day basis. If management is allocating capital effectively they will be incentivized to own significant portions of their own companies stock. Check the proxy statement. Incentives should be built into the option packages that reward long term performing metrics.
Management is usually thinking strategically when they make investing decisions involving their advertising and marketing budgets thus increasing the companies scope and influence in their industry. Research and development spending often mean sacrificing the street's quarterly earning targets in return for increased revenue growth in the future. Putting money aside for major merger and acquisitions targets can alter the strategic direction of a firm and enhance investor return in the long run. Share repurchase and dividend decisions again involve thinking in terms of years instead of months (quarterly earnings). Good luck finding any of these intangible assets on the balance sheet.
Capital spending in R&D as a percentage of sales, is increasing every year reflecting the shift in the underlying economy. M&A is the largest use of capital period. This isn't monopoly money we're talking about. The capital allocation skills of senior management is crucial to the long term success of the firm.
The capital allocation ability of management can be further observed by reading the bios of senior management. How have they handled managing investments in the past? Effective capital allocation involves a different skill set than what is required from operating the company on day to day basis. If management is allocating capital effectively they will be incentivized to own significant portions of their own companies stock. Check the proxy statement. Incentives should be built into the option packages that reward long term performing metrics.
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