Capitalizing vs Expenditure please, increase, therefore, one

slackeranalyst

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!

eagles_dare13

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.

scr879

giakhanh39 Wrote:
-------------------------------------------------------
> 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!

Think of it this way: NI is a lot higher when capitalizing vs expensing in the first year, therefore, ROA and ROE is higher, too.

cyber21

davey is correct. Just think expensing= I take the hit now, so NI is lower, but if I'm capitalizing then I'm not taking the hit to expense, so NI is higher.

rgonzalez

Thank for all help. But I have a issue.

Image a hypothetical company with some figures:

NI (before below expenditure) = $ 7,000
Expenditure = $ 1000
Asset = $ 5,000
Tax = 40%

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?