5 ms·

What is the advantage of turning an already paid capex into an opex?

by et2o 11y ago

jedberg 11y ago
I didn't word it well, but basically instead of buying more servers (increasing CapEx) you spend more OpEx instead, but not all at once. So it's better on the balance sheet because less is being spend up front (Even though it's more overall). If you mean the building, it's because they can take advantage of the gains and add that to their balance sheet and then slowly spend it back down.
- forgetsusername 11y ago
  >So it's better on the balance sheet because less is being spend up front (Even though it's more overall). A balance sheet balances, so every asset matches a liability. A sale like this doesn't alter the sheet, they are merely swapping one asset (a building) for another (cash). What is affected is cash and cash flow.
  - tryitnow 11y ago
    Actually, I think the balance sheet is affected because they're realizing a profit on the sale. The profits probably haven't been accrued in past P&L's have they? So the amount of profit will be a credit to equity and a debit to cash, improving the leverage of the balance sheet. But that's beside the point, any good analyst would have already adjusted their balance sheet to take account of the value of real estate. My best guess is that they are planning a round of lay-offs and will use progressively less space in the building. I'd wager that they plan to move headcount to lower cost areas. They also view the real estate market as peaking and want to get out at the top instead o ending up with a depreciating asset. These are just my wild guesses though, no analysis to back it up. Overall, it's a smart move.
    - richardwhiuk 11y ago
      The asset should be worth it's market value in the balance sheet, so when they realize that asset that just get the value in the balance sheet, less any loan against the building.
- westi 11y ago
  The CapEx versus OpEx game doesn't make as much difference with depreciating assets because you balance the initial expense against the asset value you are depreciating and so you spread the cost in your P&L over the time it takes to depreciate the value down to 0. So the balance between OpEx and CapEx is more which is better value for the business. Appreciating assets like building of course have a different affect on the P&L, but then so do the loans you take out to finance them.
mathattack 11y ago
Companies are rated on equity to liability ratios for creditworthiness. Assets = Liability + Equity Let's say my company has: 50 million in non-real estate assets (cash, IP, etc) 25 million in liabilities (loans, accounts payable, etc) 25 million in equity 50 million in a building paid by a loan (both an asset and a liability) If I own the building: Assets (100) = Liabilities (75) + Equity (25) Equity/Liabilities = 1/3 If I sell it, pay the loan, and lease it back to myself: Assets (50) = Liabilities (25) + Equity (25) Equity/Liabilities = 1 I appear much more credit-worthy. There may also be tax reasons for this.
- gburt 11y ago
  This sounds like a bug - a business is not clearly safer or less safe a credit risk doing the movement described. Perhaps a business opportunity there.
  - mathattack 11y ago
    There are lots of accounting bugs like this. The challenge is Accounting isn't as cut and dry as people think. For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently) One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan. Accounting is more than just consistent rules followed by the green eyeshades. :-) There are two immediate existing business opportunities: 1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work. 2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".
    - 11y ago

What is the advantage of turning an already paid capex into an opex?

by et2o 11y ago

What is the advantage of turning an already paid capex into an opex?

I didn't word it well, but basically instead of buying more servers (increasing CapEx) you spend more OpEx instead, but not all at once. So it's better on the balance sheet because less is being spend up front (Even though it's more overall). If you mean the building, it's because they can take advantage of the gains and add that to their balance sheet and then slowly spend it back down.

forgetsusername 11y ago
>So it's better on the balance sheet because less is being spend up front (Even though it's more overall). A balance sheet balances, so every asset matches a liability. A sale like this doesn't alter the sheet, they are merely swapping one asset (a building) for another (cash). What is affected is cash and cash flow.
- tryitnow 11y ago
  Actually, I think the balance sheet is affected because they're realizing a profit on the sale. The profits probably haven't been accrued in past P&L's have they? So the amount of profit will be a credit to equity and a debit to cash, improving the leverage of the balance sheet. But that's beside the point, any good analyst would have already adjusted their balance sheet to take account of the value of real estate. My best guess is that they are planning a round of lay-offs and will use progressively less space in the building. I'd wager that they plan to move headcount to lower cost areas. They also view the real estate market as peaking and want to get out at the top instead o ending up with a depreciating asset. These are just my wild guesses though, no analysis to back it up. Overall, it's a smart move.
  - richardwhiuk 11y ago
    The asset should be worth it's market value in the balance sheet, so when they realize that asset that just get the value in the balance sheet, less any loan against the building.
westi 11y ago
The CapEx versus OpEx game doesn't make as much difference with depreciating assets because you balance the initial expense against the asset value you are depreciating and so you spread the cost in your P&L over the time it takes to depreciate the value down to 0. So the balance between OpEx and CapEx is more which is better value for the business. Appreciating assets like building of course have a different affect on the P&L, but then so do the loans you take out to finance them.

mathattack 11y ago

Companies are rated on equity to liability ratios for creditworthiness. Assets = Liability + Equity Let's say my company has: 50 million in non-real estate assets (cash, IP, etc) 25 million in liabilities (loans, accounts payable, etc) 25 million in equity 50 million in a building paid by a loan (both an asset and a liability) If I own the building: Assets (100) = Liabilities (75) + Equity (25) Equity/Liabilities = 1/3 If I sell it, pay the loan, and lease it back to myself: Assets (50) = Liabilities (25) + Equity (25) Equity/Liabilities = 1 I appear much more credit-worthy. There may also be tax reasons for this.

gburt 11y ago
This sounds like a bug - a business is not clearly safer or less safe a credit risk doing the movement described. Perhaps a business opportunity there.
- mathattack 11y ago
  There are lots of accounting bugs like this. The challenge is Accounting isn't as cut and dry as people think. For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently) One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan. Accounting is more than just consistent rules followed by the green eyeshades. :-) There are two immediate existing business opportunities: 1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work. 2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".
  - 11y ago