The correlation in the chart 'Trend profitability and capex growth in the S&P 500' is obviously there but I am asking myself whether the causality is not the other way round
- If the causality were as suggested, there would be a substantial time lag between capex and profitability (investments need time to pay off). One cannot see that in the chart.
- If the causality were the other way round, no time lag would show (as is the case in the diagram): High profits (for any reason) make management immediately more optimistic and increase capex.
This is not in contradiction to the argument that capex increases profitability in the long run, it just reverses cause and effect in the short term.
"High profits (for any reason) make management immediately more optimistic and increase capex." High profits generally correlate with high cash flow. Cash flow funds investment, especially when managements prefer to finance internally as oposed to external debt or, worse, equity capital raising.
Fished this important piece out of the must-read printed off stack. It's spot on to address the question of the relationship between spend and growth. Stops short of macro or managerial NPV analysis (what can anyone do in a 3pp Substack!).
The correlation in the chart 'Trend profitability and capex growth in the S&P 500' is obviously there but I am asking myself whether the causality is not the other way round
- If the causality were as suggested, there would be a substantial time lag between capex and profitability (investments need time to pay off). One cannot see that in the chart.
- If the causality were the other way round, no time lag would show (as is the case in the diagram): High profits (for any reason) make management immediately more optimistic and increase capex.
This is not in contradiction to the argument that capex increases profitability in the long run, it just reverses cause and effect in the short term.
"High profits (for any reason) make management immediately more optimistic and increase capex." High profits generally correlate with high cash flow. Cash flow funds investment, especially when managements prefer to finance internally as oposed to external debt or, worse, equity capital raising.
Fished this important piece out of the must-read printed off stack. It's spot on to address the question of the relationship between spend and growth. Stops short of macro or managerial NPV analysis (what can anyone do in a 3pp Substack!).