We often hear about what is asset capitalization and what are its effects on the real estate industry. But what is it? Well, asset capitalization is the process of adding up all of your financial assets such as fixed assets, identifiable intangible assets and even assets like goodwill and patent rights. It then divides the difference between what you owe and what you have capitalized in order to determine what is owed.
Now, back to what is asset capitalization and how it affects you. Basically what is asset capitalization is comparing what you have with what you have capitalized. So what is being capitalized here is your net worth or what is called liquid net worth. Your long term value is also being calculated, which means your net worth over a period of time.
In a nutshell, net worth is what the business is worth after all of the debts have been paid and all of the assets are intact. It can also include any goodwill that a business has which gives you an advantage. On the downside, it doesn’t always reflect what the business actually produces or what profits can be expected. This could be due to under-reporting of profits and over-reporting of expenses. Usually when you hear about a business going public or being valued at a big number, this usually indicates a great deal of liquidity which means there’s plenty of money for investors and borrowing and little room to lose.
If you have trouble understanding this concept, think of it like being on the winning team in a sports game. You’ve been playing against some pretty good competition and now you’re the underdogs. You’ve practiced your game plan and strategy and figured out the best routes and cross roads to take so that you can get to the end zone. What you really need to learn is what is asset capitalization and how it affects your bottom line.
Most businesses start off small with just one or two assets and quickly add more as they see the profits rolling in. This is called an initial public offering (or IPO). An IPO is a highly expensive process that normally only big companies go through. They are considering a private placement and are listed on the stock market. The price of the stock is set by a panel of independent observers who view the company’s financial records.
So, we know what assets are. Now we want to know what is asset capitalization? Well, it is basically how much you are willing to pay for those assets. Now, you must be careful when adding up the capital for each asset, because you must account for the cost of any expansion projects. Also, some companies are flush with cash but still need more assets to stay competitive so they can grow their business. That’s why companies can have multiple streams of revenue, even though they may have the same product.
Companies can choose to issue either common or preferred shares and they can issue debt or debentures. Common stocks are usually cheaper than preferred stocks, but debt is always preferable to equity. You can learn about what is asset capitalization by looking at some financial statements of publicly traded corporations. I recommend looking up some stock price history and doing some fundamental analysis.
In summary, asset capitalization theory is really confusing. It would be much better if you were taught about it in school. For the most part it is simple economics that describes how you acquire resources and what your return on those resources is. If you want to learn more about the theory of asset capitalization, check out the free e-courses offered by the University of Chicago’s Finance department.