How can something be profitable, but also have negative cash flow?
It’s been about thirty years since I took an accounting class, but I think capital expenditures like this AI spending are amortized (deferred?) over several years and don’t fully count towards present expenses. So the chunk that counts for this quarter/year can still be small enough to make the company profitable (income > expenses). Free cash flow I would guess is money that came in minus money actually spent, so something like a $1m capital expenditure might count as $100k for this year’s expenses but the full $1m for calculating cash flow.
Yes, that’s essentially it. Also, for instance, if a company buys something in one month and pays for it the next, then the costs apply to the first month, but it affects the cash flow on the second.
Capital expenditures are for things that are expected to last a long time, like buildings and vehicles, so I guess the accounting rules around them are meant to allow the costs to be realized over a similarly long time. The idea is probably that companies would be less likely to invest in capital if it meant taking a big hit all at once. But I’m not an accountant.
It’s been about thirty years since I took an accounting class, but I think capital expenditures like this AI spending are amortized (deferred?) over several years and don’t fully count towards present expenses. So the chunk that counts for this quarter/year can still be small enough to make the company profitable (income > expenses). Free cash flow I would guess is money that came in minus money actually spent, so something like a $1m capital expenditure might count as $100k for this year’s expenses but the full $1m for calculating cash flow.
Yes, that’s essentially it. Also, for instance, if a company buys something in one month and pays for it the next, then the costs apply to the first month, but it affects the cash flow on the second.
Why can they spend money now, but make it so on paper it’s as if they spent it next quarter?
Capital expenditures are for things that are expected to last a long time, like buildings and vehicles, so I guess the accounting rules around them are meant to allow the costs to be realized over a similarly long time. The idea is probably that companies would be less likely to invest in capital if it meant taking a big hit all at once. But I’m not an accountant.