Consider two companies that are identical in terms of current operating cash flows and current capital investment. They are also identical in terms of the rate of future growth in operating cash flows. The only difference is that company A has a higher rate of growth in capital expenditures than company B. Which company is more valuable, and why?

Question

Business

Kadin Wiggins

16 August, 09:56

Consider two companies that are identical in terms of current operating cash flows and current capital investment. They are also identical in terms of the rate of future growth in operating cash flows. The only difference is that company A has a higher rate of growth in capital expenditures than company B. Which company is more valuable, and why?

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Answers (1)

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Aedan Brewer · Answer 1

Answer: Most likely Company A

Explanation:

Generally an increase in Capital Expenditure means that a company is investing more which would mean that revenue will increase in future which will give it a higher valuation.

However, sometimes this spending might just be on Maintenance of Capital assets. When this happens the company is given a lower valuation.

Plainly speaking therefore, if Company A has a higher growth rate in Capital Expenditure because they are investing which is likely to be the case, then they would be more valuable than Company B.