Beware Overuse of Capitalized Expenses

One more note for today -

Examining Toyota's annual report, this crossed my mind. Sometimes companies capitalize expenses and report high net income although cash flow was negative. The trick is that they have to amortize these expenses, which will show up as negative net income whenever the amortization occurs. So you can see companies with high current capitalized expenses, and predict a negative impact on net income in the future.

For example, an airline: If it buys 100 airplanes, it will capitalize that expense and build its assets rather than reduce net income. But then it has to amortize the value of those planes. So you will probably see a reduction in net income in the future. A good trick might be to look at the average age of a fleet of planes before you invest in an airline company. Other industries face this risk as well if they have high capital requirements.