10/11/2019 Capital Investment Definition

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Capital Investment
REVIEWED BY WILL KENTON | Updated Apr 25, 2019

What Is a Capital Investment?

Capital investment is a sum of money provided to a company to further its business
objectives. The term also can refer to a company's acquisition of long-term assets such as
real estate, manufacturing plants, and machinery.

How Capital Investment Works

Capital investment is a broad term that can be defined in two distinct ways:

An individual, a venture capital group, or a financial institution may make a capital

investment in a business. A sum of money is handed over as a loan or in return for a
promise of repayment or a share of the profits down the road. In this sense of the word,
capital means cash.
The executives of a company may make a capital investment in the business. They buy
long-term assets that will help the company run more efficiently or grow faster. In this
sense, capital means physical assets.

In either case, the money for capital investment has to come from somewhere. A new
company might seek capital investment from any number of sources including venture
capital firms, angel investors, and traditional financial institutions. The capital is to be used
to further develop and market its products. When a new company goes public, it is acquiring
capital investment on a large scale from many investors.

An established company might make a capital investment using its own cash reserves, or
seek a loan from a bank. If it is a public company, it might issue a bond in order to finance
capital investment.

There is no minimum or maximum capital investment. It can range from less than $100,000 in
seed financing for a start-up to hundreds of millions of dollars for massive projects
undertaken by companies in capital-intensive sectors such as mining, utilities, and
infrastructure.

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10/11/2019 Capital Investment Definition

[Important: Capital investment is meant to benefit a company in the long run, but it
nonetheless can have short-term downsides.]

Special Considerations
A decision by a business to make a capital investment is a long-term growth strategy. A
company plans and implements capital investments in order to ensure its growth in the
future.

Capital investments generally are made to increase operational capacity, capture a larger
share of the market, and generate more revenue. The company may make a capital
investment in the form of an equity stake in another company's complementary operations
for the same purposes.

The Disadvantages of Capital Investment

The first funding option for capital investment is always a company's own operating cash
flow, but that may not be enough to cover the anticipated cost. It is more likely that the
company will resort to outside financing to make up for any internal shortfall.

Capital investment is meant to benefit a company in the long run, but it nonetheless can
have short-term downsides. Intensive, ongoing capital investment tends to reduce earnings
growth in the short term, and that is never a popular move among stockholders of a public
company. Moreover, the total amount of debt a company has on the books is a figure that is
closely watched by stock owners and analysts.

Key Takeaways
A capital investment can be defined as a sum of cash acquired by a company to pursue its
objectives.
It also can refer to a company's acquisition of permanent assets.
In the latter case, the company is making an investment in its own future.

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