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Investments don't actually diminish profits. If Amazon buys a house for 10mill$, their profit doesn't change by a cent, because while they may have less cash, t

Investments don't actually diminish profits. If Amazon buys a house for 10mill$, their profit doesn't change by a cent, because while they may have less cash, they also own a 10mill$ building. The value of investments is spread out over whatever is reasonable for the category (i. e.: Building: 10 years or so, car: 3 or 4 years, javascript framework: 8 hours).

Arnt 11y ago
True for the building itself, but is buying office space and warehouses a large part of setting up a new business? I'd have thought that market surveys, planning and negotiations, hiring the initial staff etc would dominate.
- matt4077 11y ago
  It depends – you can generally expense anything you buy over it's useful lifetime, so if you aquire a patent for your new project, you'll spread that investment over the next few years. If you hire an architect, it's part of the building's cost. The only exemption I've ever encountered is intellectual property that you create with employees – there'd be just too much uncertainty over it's value so you suffer those costs immediately (which can be a good thing, it lowers your taxes etc). But yes, if you're investing a lot there will be some negative effect from the beginning because everything starts losing value immediately and revenue only starts later. Note that all this is completely removed from cash flow. You'll have to pay for all the stuff you buy – usually pretty quickly. There have been companies with excellent balance sheets which still ran out of money because all the value was in illiquid investments. That's why companies often prefer to lease cars or machinery: it gets the different cycles in sync. (all based on the laws of my small European country. Not endorsed by GAAP. Lack of acronyms caused by inexplicable loss of the relevant vocabulary once I got away from all the CXXs)
  - siliconviking 11y ago
    Well said. Though here in the US a significant (sometimes) portion of employee costs lies in stock based comp. And many times, co's present non-GAAP numbers that strip out this part from their income (which inflates their income, and sometimes that can be the difference between making a profit or a loss). The stock based comp gets reflected in increased share count over time, so it will show up in the stock price, just not in the presented non-GAAP income.
k_bx 11y ago
Yeah, but paying money to new stuff which don't yet produce profit would make profits less, wouldn't it?
rahimnathwani 11y ago
Investments do usually diminish profits in the year in which they're incurred. If Amazon buys a $1000 laptop for one of their engineers, in the middle of the year, and they depreciate it over 2 years, then $250 will be charged to the depreciation account in the current year, reducing profits by that amount.

Arnt 11y ago

True for the building itself, but is buying office space and warehouses a large part of setting up a new business? I'd have thought that market surveys, planning and negotiations, hiring the initial staff etc would dominate.

matt4077 11y ago
It depends – you can generally expense anything you buy over it's useful lifetime, so if you aquire a patent for your new project, you'll spread that investment over the next few years. If you hire an architect, it's part of the building's cost. The only exemption I've ever encountered is intellectual property that you create with employees – there'd be just too much uncertainty over it's value so you suffer those costs immediately (which can be a good thing, it lowers your taxes etc). But yes, if you're investing a lot there will be some negative effect from the beginning because everything starts losing value immediately and revenue only starts later. Note that all this is completely removed from cash flow. You'll have to pay for all the stuff you buy – usually pretty quickly. There have been companies with excellent balance sheets which still ran out of money because all the value was in illiquid investments. That's why companies often prefer to lease cars or machinery: it gets the different cycles in sync. (all based on the laws of my small European country. Not endorsed by GAAP. Lack of acronyms caused by inexplicable loss of the relevant vocabulary once I got away from all the CXXs)
- siliconviking 11y ago
  Well said. Though here in the US a significant (sometimes) portion of employee costs lies in stock based comp. And many times, co's present non-GAAP numbers that strip out this part from their income (which inflates their income, and sometimes that can be the difference between making a profit or a loss). The stock based comp gets reflected in increased share count over time, so it will show up in the stock price, just not in the presented non-GAAP income.

k_bx 11y ago

Yeah, but paying money to new stuff which don't yet produce profit would make profits less, wouldn't it?

rahimnathwani 11y ago

Investments do usually diminish profits in the year in which they're incurred. If Amazon buys a $1000 laptop for one of their engineers, in the middle of the year, and they depreciate it over 2 years, then $250 will be charged to the depreciation account in the current year, reducing profits by that amount.