How to identify ill advised Capex spending by looking at a company reports
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A large canadian company with over 10 billion in sales and 4.5 gross profit and 1.5 million net profit.
The company invested 500 million in a large IT software replacement initiative that failed.
The spending was done as capex hence it does not show on P/L
How would this investment show on the balance sheet..
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dudewheresmycar
Senior Desi
Member since: Jan 07
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Posts: 980
Location:
 08-09-11 14:03:47
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pratickm
Global Moderator
Member since: Feb 04
Posts: 2831
Location: Toronto
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Quote:
Originally posted by dudewheresmycar
A large canadian company with over 10 billion in sales and 4.5 gross profit and 1.5 million net profit.
The company invested 500 million in a large IT software replacement initiative that failed.
The spending was done as capex hence it does not show on P/L
How would this investment show on the balance sheet..
It should show on the cash flow statement, usually after Cash from Operations.
It won't be on the balance sheet directly, but the effect can be seen as a reduction in cash and increase in tangible assets (assuming some computers or software were purchased).
However, if the total thing is a disaster i.e. company has nothing to show for that expenditure then the net effect will be simply a reduction in cash balance.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
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08-09-11 21:18:56 |
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dudewheresmycar
Senior Desi
Member since: Jan 07
Posts: 980
Location:
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But reading BS increase in tangible asset does not tell us the project failed.
Why i ask is because i know a company where a project has failed but has not come out in the market..
So how do u identify such issues with companies.
Quote:
Originally posted by pratickm
Quote:
Originally posted by dudewheresmycar
A large canadian company with over 10 billion in sales and 4.5 gross profit and 1.5 million net profit.
The company invested 500 million in a large IT software replacement initiative that failed.
The spending was done as capex hence it does not show on P/L
How would this investment show on the balance sheet..
It should show on the cash flow statement, usually after Cash from Operations.
It won't be on the balance sheet directly, but the effect can be seen as a reduction in cash and increase in tangible assets (assuming some computers or software were purchased).
However, if the total thing is a disaster i.e. company has nothing to show for that expenditure then the net effect will be simply a reduction in cash balance.
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Last edited by: dudewheresmycar on 09-09-11 06:57:36 |
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09-09-11 06:26:21 |
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pratickm
Global Moderator
Member since: Feb 04
Posts: 2831
Location: Toronto
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Quote:
Originally posted by dudewheresmycar
But reading BS increase in tangible asset does not tell us the project failed.
Why i ask is because i know a company where a project has failed but has not come out in the market..
So how do u identify such issues with companies.
Have the quarterly financial statements been released yet?
Is the capex reflected on the cash flow statement?
That is the first place to look.
If the statements have been released, what is the explanation by the company for the drop in cash balances, or the increased write off?
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Last edited by: pratickm on 09-09-11 18:59:56 |
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09-09-11 18:59:37 |
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