There is no wonder in saying that growing a business is a very difficult job without having the proper knowledge. It is important for all the companies and businesses to reinvest the profits in other things to make it more efficient. In the technical terms, this reinvesting process is termed as sustaining capital reinvestment. Though this is one of the most things for business growth but still, most people don’t have accurate information about it. So if you want to know more, then in this article you will get a lot of useful information about it.
What is Sustaining Capital Reinvestment?
Sustaining Capital Reinvestment is a process in which a company invests the capital into the business to continue the ongoing operations at all levels. In simple words, it is done to maintain the current level operations of the company. The amount that is used for the investment is the net of the current pricing or value of available income tax deductions (tax shield). And while the evaluation of the firm value, it is subtracted during the per annum cash flow computation. Apart from this, it is also referred to as maintenance capex. To help you understand better, here is an example- Suppose if a company made a $40 million profit in the first year. In the next year, the company got some new projects that require 50$ million to continue the operations. In that scenario, the company will put the extra 50$ to continue the operation. So the other $10 million will be called capital reinvestment.
To evaluate the voluntary flow of cash after-tax, capital reinvestment is subtracted from cash flow after tax. It is done under the capitalized cash flow and left cash flow approach. After that, a deducted rate is put into it to evaluate the value of the business. Another thing that is important to analysis the evaluation of the suitable level of capital reinvestment, it is mandatory to continue the profitability and the ongoing operation of a firm of company. This evaluation is drawn based on past capital expenditure levels. In the cases of a notable capital outlay to encourage expansion and the growth of the business the analysis of the past expenditure levels becomes a little difficult. Another important thing is that the profitability and the revenue can be influenced positively in the coming time but the capital investment is the thing that happens once. This can firmly influence the valuation of the business, that’s why most of the sellers willing to start a debate that capital investment should be considered as sustaining vs growth. Now maybe some of you must be thinking that how much is considered to be sustaining or growth capital. Well, this question is a little complicated and is often a topic of debate between sellers and buyers. Analysis to support between both might include:
• Comparison of the past per annum revenue growth and capital expenditure growth
• The actual fleet size per annum analysis. Replacing an old tool with the acquisition of new tool can be said as sustaining vs growth