Loading the player...

What is 'Capital Investment'

Capital investment refers to funds invested in a firm or enterprise for the purpose of furthering its business objectives. Capital investment may also refer to a firm's acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years. Sources of capital investment are manifold and can include equity investors, banks, financial institutions, venture capital and angel investors.

BREAKING DOWN 'Capital Investment'

While capital investment is usually earmarked for capital or long-life assets, a portion may also be used for working capital purposes. Capital investment encompasses a wide variety of funding options. While funding for capital investment is generally in the form of common or preferred equity issuances, it may also be through straight or convertible debt. It may range from an amount of less than $100,000 in seed financing for a start-up to amounts in the hundreds of millions for massive projects in capital-intensive sectors such as mining, utilities and infrastructure.

Uses of Capital

Capital investment is concerned with the deployment of capital for long-term uses. Companies make continual capital investment to sustain existing operations and expand their businesses for the future. The main type of capital investment is in fixed assets to allow increased operational capacity, capture a larger share of the market and in the process, generate more revenue. Companies may also make capital investment in the form of equity stakes in other companies' operations, which indirectly benefits the investor companies by building business partnerships or expanding into new markets.

Sources of Capital

Companies make conscious decisions about what kind of capital investment and how much of it they should have over time. This spells out the funding requirements and therefore affects the choice of financing sources. The first funding option is always a company's own operating cash flow, which sometimes may not be enough to satisfy the amount of capital expenditures required. It is more likely than not that companies will resort to outside financing, debt or/and equity to make up for any internal cash flow shortfall.

Capital investment is meant to benefit a company in the long run, but it nonetheless has some short-term downsides. Intensive, ongoing capital investment tends to reduce earnings in the interim, strain on liquidity from payment demand on interest and maturing principals, and dilute earnings and ownership if new equity is used.

Working Capital

Funds raised as long-term capital should be for long-term purposes of capital investment to make comparable returns and adequately cover related financing costs. However, to maintain uninterrupted operations, companies need to have extra current assets over total current liabilities as an added assurance for meeting any due obligations. Short-term funds set aside as such are commonly referred to as working capital and may come from long-term capital, whose longer maturity dates are typically beyond the due dates of any current liabilities. As a result, companies sacrifice some long-term return to ensure short-term liquidity.

RELATED TERMS
  1. Capital Funding

    Capital funding is the money that lenders and equity holders ...
  2. Capital

    Capital is a term for financial assets or their financial value, ...
  3. Capital Flows

    Capital flows entail the path that money travels through corporations, ...
  4. Cost of Capital

    Cost of capital is the required return necessary to make a capital ...
  5. Working Capital

    Working capital, also known as net working capital is a measure ...
  6. Capitalization Structure

    Capitalization structure refers to the proportion of debt and ...
Related Articles
  1. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  2. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  3. Managing Wealth

    Issued share capital versus subscribed share capital

    Learn the difference between issued share capital versus subscribed share capital. Get information about various types of capital.
  4. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  5. Investing

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  6. Investing

    Understanding Verizon's Capital Structure (VZ)

    Verizon has a highly leveraged capital structure, and this debt capitalization and the company's equity have affected its enterprise value.
  7. Investing

    Understanding Bank of America's Capital Structure (BAC)

    For banks, especially large banks such as Bank of America, capital structure has to both meet funding needs and satisfy the regulator's capital requirements.
  8. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  9. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
RELATED FAQS
  1. Can working capital be negative?

    Negative working capital can arise under certain circumstances. Working capital can be negative if a company's current assets ... Read Answer >>
  2. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  3. What does low working capital say about a company's financial prospects?

    Find out what it means when a company has low working capital, including how this metric is interpreted based on business ... Read Answer >>
  4. What does high working capital say about a company's financial prospects?

    Learn about net working capital and what a high figure indicates about a company's financial prospects, including the importance ... Read Answer >>
  5. Does working capital measure liquidity?

    Learn about working capital and liquidity, and how working capital measures the liquidity, efficiency and overall health ... Read Answer >>
  6. What can working capital be used for?

    Find out what working capital is used for, including how to calculate this financial metric by subtracting current liabilities ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center