Capital investment refers to the acquisition of money by a company to help it achieve its business goals. This term can also be used to describe a company’s purchase of long-term assets like real estate, manufacturing plants, and machinery.
Capital investment can be defined as the amount of cash a company acquires to achieve its goals, such as growing or continuing operations.
It can also refer to a company’s acquisition or lease of permanent fixed assets, such as property, equipment, and plant (PP&E).
There are many ways to make a capital investment. You can use cash, sell other assets or raise capital by issuing equity or debt.
How Capital Investment Works
Capital investment can be described in two ways.
A capital investment may be made by an individual, venture capitalist group, or financial institution. In return for repayment or a share in the future profits, a loan is a sum of money that is given to a business. Capital can also be translated as cash in this sense.
Executives of companies may invest capital in their business. They may buy long-term assets that will allow the company to grow or run more efficiently. Capital can also refer to physical assets.
In both cases, capital investment money must be sourced from somewhere. An investor might be a venture capital firm, angel investors, or traditional financial institutions. The capital is used by the company to develop and market new products. A new company becomes public by acquiring large amounts of capital investment from many investors.
A well-established company may make a capital purchase using its cash reserves or borrow money from a bank. It might issue bonds to finance capital investments if it is a publicly traded company.
There is no minimum capital investment or maximum capital. This can be as low as $100,000 for seed financing, or as high at hundreds of millions for large projects by capital-intensive companies such mining, utilities, and infrastructure.
Important: While capital investment can be beneficial for a company over the long-term, it can also have short-term negative effects.
The decision of a company to invest in capital is a long-term strategy for growth. To ensure future growth, a company plans and executes capital investments.
Capital investments are generally made to improve operational capacity, increase market share, or generate more revenue. A capital investment may be made in equity shares in other companies’ complementary operations to achieve the same goals.
Capital Investment and the Economy
Capital investment is a key indicator of the health and well-being of an economy. Businesses that invest capital in capital are more confident about the future and plan to expand their existing production capacity.
Recessions, on the other hand are usually associated with a reduction in capital investment by companies.
Businesses that are not capital-intensive
Non-capital intensive businesses do not require large amounts of capital investment. Non-capital intensive business types include software development, finance and consulting. These businesses don’t require large investments or the ability to maintain expensive equipment.
Capital Investment: Disadvantages
Capital investment can be funded first by the company’s operating cash flow. However, this may not be sufficient to cover all anticipated costs. To make up any shortfalls, it is more likely that the company will seek out outside financing.
While capital investment can be beneficial for a company over the long-term, it can also have short-term negatives. Capital investment that is ongoing and intensive tends to slow down earnings growth, which is not a good idea for stockholders. Stock owners and analysts closely monitor the amount of debt that a company holds.