标题: Capitalizing vs Expenditure [打印本页] 作者: suyash1989 时间: 2011-7-27 10:52 标题: Capitalizing vs Expenditure
In Schwesernotes stated that: "Capitalizing an expenditure will initially results in higher return on assets (ROA) and higher return on equity (ROE)". Any one can prove it for me, please?
I think Capitalizing make higher return but increase asset or equity also, therefore, I am not sure such ratios up or down relatively expensing!!! May it give more condition like ROA is more or less than 1 to be more clear???
Thank for any help!作者: pennyless 时间: 2011-7-27 10:52
It is because of this inequality:
Numerator / Denominator <= (Numerator+k) / (Denominator+k)
For any non-negative k and numerator <= Denominator.
Although, I think there should be a tax effect too. $100 not expens'd means $30 of tax. Then the numerator and denominator are not increasing by the same amount.作者: ap0258 时间: 2011-7-27 10:53
So,
If Capitalize, ROA = $ 7,000/ ($ 5,000+$ 1000)= 117%
If Expensing, ROA = ($ 7,000-($1000x60%))/$5,000= 128% greater than 117% (in frist year)???
Am I misunderstand in somewhere?作者: therecruit 时间: 2011-7-27 10:53
Giakhanh39,
From your example, only issue I see is if a company can produce $7000 NI from $5000 Assets, that is awesome!!! It could be possible if it is a service oriented company with less assets, but then expenses have to be much higher for salaries, overhead etc. So, in my opinion, this hypothetical scenario is not possible....
More realistically, companies have much much higher assets than NI.
SJ
Edited 2 time(s). Last edit at Friday, July 1, 2011 at 12:06PM by stockjaguar.
