What Is Capital Investment?
Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. Real estate, manufacturing plants, and machinery are among the assets that are purchased as capital investments.
The capital used may come from a wide range of sources from traditional bank loans to venture capital deals.
- Capital investment is the expenditure of money to fund a company's long-term growth.
- The term often refers to a company's acquisition of permanent fixed assets such as real estate and equipment.
- The funds for capital investment can come from a number of sources, including cash on hand, though big projects are most often financed through obtaining loans or issuing stock.
- A venture capital firm is by definition a source of capital investment.
How Capital Investment Works
Capital investment is a broad term that can be defined in two distinct ways:
- An individual, a venture capital group or a financial institution may make a capital investment in a business. The money can be provided as a loan or a share of the profits down the road. In this sense of the word, capital means cash.
- The executives of a company may make a capital investment in the business. They buy long-term assets such as equipment that will help the company run more efficiently or grow faster. In this sense, capital means physical assets.
In either case, the money for capital investment must come from somewhere. A new company might seek capital investment from any number of sources, including venture capital firms, angel investors, or traditional financial institutions. When a new company goes public, it is acquiring capital investment on a large scale from many investors.
An established company might make a capital investment using its own cash reserves or seek a loan from a bank. It might issue bonds or stock shares in order to finance capital investment.
There is no minimum or maximum capital investment. It can range from less than $100,000 in seed financing for a start-up to hundreds of millions of dollars for massive projects undertaken by companies in capital-intensive sectors such as mining, utilities, and infrastructure.
Capital investment is meant to benefit a company in the long run, but it nonetheless can have short-term downsides.
A decision by a business to make a capital investment is a long-term growth strategy. A company plans and implements capital investments in order to ensure future growth.
Capital investments generally are made to increase operational capacity, capture a larger share of the market, and generate more revenue. The company may make a capital investment in the form of an equity stake in another company's complementary operations for the same purposes.
Disadvantages of Capital Investment
The preferred option for capital investment is always a company's own operating cash flow, but that may not be sufficient to cover the anticipated costs. It is more likely the company will resort to outside financing.
Capital investment is meant to benefit a company in the long run, but it nonetheless can have short-term downsides:
- Intensive, ongoing capital investment tends to reduce earnings growth in the short term, and that never pleases stockholders of a public company.
- Issuing additional stock shares, which is often the funding option for public companies, dilutes the value of its outstanding shares. Existing shareholders generally dislike finding that their stake in the company has been reduced.
- The total amount of debt a company has on the books is closely watched by stockholders and analysts. The payments on that debt can stifle the company's further growth.