Hmmm, rationing…We know what you're thinking: the only rationing you've ever considered involves the aftermath of a zombie apocalypse. That's why you've been stockpiling cans of beans and bottles of water in the basement. But this kind of rationing involves rationing of capital spending.
Capital spending is the money a company uses on things like facilities, materials and supplies...all the expenses meant to support your company and drive growth. But say your last capital spending idea wasn't so hot. You purchased a lot of canned beans to store in the basement...you know, just in case. Then your boss is likely to impose a restriction on the capital projects of yours he's willing fund. A little rationing.
Some of this is just normal business decision making. Every company has limited capital. Even giant cash machines like Google or Apple have a finite level of resources. So any company has to make choices about where it invests its resources. It needs to ration. Making the right choices is how companies stay viable over time and increase their stock prices. At least until the zombies come...
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Finance: What Does "Capital Intensive" M...27 Views
Finance a la shmoop what does capital-intensive mean? lots and lots and
lots and lots of capital yeah that's what it means starting a website, two [Two young kids setting up a website in a garage]
kids a garage and a nice home computer not capital intensive, drilling for oil
in the North Sea highly capital intensive...
well capital needed for the two kids in a garage building a search engine about
two million bucks capital needed for the oil rig well like ten billion bucks and
why does the capital intensity matter well if you can create Google that
generates a few billion dollars of free cash flow a quarter for a total capital
input of maybe a hundred million dollars ie a few rounds after the garage round [Equity investment agreement documents appear]
then investors in it make an absolute killing like if you don't dilute
yourselves and the stock goes up a lot life's good yeah hundreds or thousands
of times their original investment if you create BP British Petroleum or Royal
Dutch Shell or Chevron which also have a few billion dollars of free cash flow a [Cash flowing into fuel tanks]
quarter but it takes you ten billion dollars in capital to generate those
returns then yes you get a nice investment return but it's nothing that
you know Vikings sing songs about and it's the allure of the capital [Man typing on laptop]
unintensive businesses like building a website in Yahoo or a search engine in Google or a video streaming
site in Netflix that takes relatively small amounts of capital to start and
then produces mounds of free cash profits that has made venture
capitalists fall all over themselves hoping to find that one little garage [Person looking through binoculars at garages]
with the next great white whale yeah that's intensive...
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