Can you explain how capital expenditures do not affect profits? Doesn't capitalization just mean that expenses are applied over time? They don't disappear, correct?
Capital expenses do not affect profits for the reporting period they happen in. It is true that after that reporting period there is a depreciation cost applied to take account of loss of value of an asset.
For example, if a company buys a distribution center, it will not expense the cost of the distribution center as an expense. But as time goes on it will expense a depreciation expense that accounts for the loss of value of the distribution center as the building gets older, less useful, etc. But buildings last for a long time, and a building with the land it is on never actually goes down to a value of zero. So not all expenses associated with the distribution center will be applied over time.
So capitalizing something definitely helps you get more income.
Profit is how much your total assets have increased in value. Cash is an asset and a warehouse is an asset. If you spend $1m of your cash that would otherwise have been cash profits to build a warehouse worth $1m, your total assets remain the same and thus your profits remain the same.
But, unlike cash, a building doesn't retain its (dollar) value forever, it must be written off. I'm not sure how buildings are written off since they have a rather long "shelf" life, but laptops are generally written off over three year. So if you buy a $1500 laptop with cash in year 0, your profits in year zero are unaffected, but you must book a depreciation (a reduction in the value of your assets) worth $500 in years 1, 2 and 3. Hopefully you will, as with your warehouse, use your new asset to book profits in each of these years in excess of your write-offs.
Last quarter, Amazon had 834M of depreciation, and 281M of stock-based compensation: 1.1 billion of non-cash deductions from revenue. They made capital expenditures of 1.03 billion. They ended the quarter with about $100 million more cash than they started with.
In general when you're a CEO or board member you'll make more money by granting yourself $x million in stock than you'll make by paying a dividend of $x million which has to be shared among all investors.
Not to mention, there are tax benefits to stock based comp. First, you often have the choice of when to exercise the stock which can make a world of difference especially with AMT, and second, if you hold for a year you'll pay the long term cap gains rate. For lower income people (hehe in this case that would be people who make less than $400k) that's still 15% which is an incredible discount. For higher income folks it's now about 23% but, again, that represents a tidy discount against their marginal tax rate.
Yes. Capital expenditures don't disappear. You can buy a piece of land to build a warehouse. You can sell the land to get money back if needed, so you can't report the money for the land as loss.
For example, if a company buys a distribution center, it will not expense the cost of the distribution center as an expense. But as time goes on it will expense a depreciation expense that accounts for the loss of value of the distribution center as the building gets older, less useful, etc. But buildings last for a long time, and a building with the land it is on never actually goes down to a value of zero. So not all expenses associated with the distribution center will be applied over time.
So capitalizing something definitely helps you get more income.