Net capital spending is an important metric that measures a company’s investments in fixed assets and gives insight into its growth. But how exactly do you calculate net capital spending? In this comprehensive guide we’ll walk through the step-by-step process of computing net capital spending using examples and provide tips on analyzing this capital budgeting metric.
What is Net Capital Spending?
Net capital spending refers to the net amount a company spends to acquire fixed assets like property, plants, and equipment during a period. It indicates how much a company’s investments in fixed assets have changed over time
Higher net capital spending generally signals business expansion and growth. Lower or negative spending can suggest stagnation or decline. Tracking net capital spending helps assess a company’s growth trajectory.
Step 1: Calculate Change in Net Fixed Assets
The first step in computing net capital spending is calculating the change in net fixed assets from the start to end of the period.
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Net fixed assets include tangible, long-term assets like land, buildings, machinery, equipment, vehicles, furniture, etc.
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Find the net fixed assets value on the balance sheet. Note the balances at the beginning and end of the relevant period.
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Change in Net Fixed Assets = Ending Net Fixed Assets – Beginning Net Fixed Assets
This change reflects the net amount spent on fixed assets purchases during the year. A higher change signals greater fixed assets investments.
Step 2: Add Back Depreciation Expense
Next, the depreciation expense for the period needs to be added back.
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Depreciation reduces the book value of fixed assets to account for wear and tear over time.
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But it is a non-cash accounting charge that doesn’t involve actual cash spending.
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Find the depreciation expense amount on the income statement or cash flow statement.
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Add back this depreciation to the change in net fixed assets.
The Net Capital Spending Formula
Putting it together, the formula is:
Net Capital Spending = (Ending Net Fixed Assets – Beginning Net Fixed Assets) + Depreciation
This calculates the total cash spent on new fixed assets purchases in a period.
Net Capital Spending Example
Let’s look at a quick example to illustrate the net capital spending calculation:
- Beginning net fixed assets: $5 million
- Ending net fixed assets: $7 million
- Depreciation expense: $1 million
Applying the formula:
- Change in Net Fixed Assets = $7 million – $5 million = $2 million
- Add Back Depreciation = $1 million
- Net Capital Spending = $2 million + $1 million = $3 million
So the total cash spent on new fixed assets for the period is $3 million.
Tips for Analyzing Net Capital Spending
When analyzing net capital spending, consider these tips:
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Compare over time – Look at trends in the company’s net capital spending over the last few years. Is it increasing, decreasing, or stable?
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Compare to peers – How does the company’s capital spending compare to close competitors? Higher spending than peers may suggest higher growth.
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Assess capital intensity – Compare net capital spending to metrics like revenue and EBITDA to gauge capital intensity. More capital intensive businesses tend to have higher spending.
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Consider growth plans – Tie back to company guidance and growth expectations. Is net capital spending aligned with strategic plans?
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Forecast future spending – Past trends and guidance can help predict near-term net capital spending. This supports financial projections and valuation models.
Uses of Net Capital Spending
Key uses of the net capital spending metric include:
- Evaluating growth trends and business expansion
- Assessing capital intensity and investment requirements
- Estimating maintenance vs. growth capital spending
- Informing capital budgeting decisions on projects
- Building 3 statement projection models for forecasts
- Determining reinvestment needs for valuation models
Net Capital Spending CalculatorBasic CalculatorAdvanced Calculator
Enter any 3 values to calculate the missing variable Ending Fixed Assets ($) Beginning Fixed Assets ($) Depreciation ($) Net Capital Spending Total Investments in Fixed Assets ($) Sale of Fixed Assets ($) Depreciation Expense ($) Adjusted Net Capital Spending
Enter the ending fixed assets, beginning fixed, and total depreciation into the calculator to determine the net capital spending.
Net Capital Spending Formula
The following formula is used to calculate net capital spending.
- Where NCS is the net capital spending ($)
- EFA is the ending fixed assets ($)
- BFA is the beginning fixed assets ($)
- D is the total depreciation
To calculate the net capital spending, subtract the beginning fixed assets value from the ending value, then add the total depreciation.
Chapter 2 Finance Class: Net Capital Spending
How do you calculate net capital spending?
To calculate net capital spending, the following two steps can be followed: The net capital spending formula is equal to the change in net fixed assets plus depreciation. Net Capital Spending (NCS) = (Ending Net Fixed Assets – Beginning Net Fixed Assets) + Depreciation Where:
How do you calculate net capital spending (NCS)?
Net Capital Spending (NCS) = (Ending Net Fixed Assets – Beginning Net Fixed Assets) + Depreciation Where: Net Fixed Assets: “Ending Net Fixed Assets” refers to the current period balance, while the “Beginning Net Fixed Assets” refers to the prior period’s ending balance.
What is net capital spending?
The net capital spending of a company is the amount spent on purchasing fixed assets in a particular period. The fixed asset (i.e. PP&E) categorization refers to non-current, tangible assets that can provide economic value for more than twelve months.
Why do investors calculate net capital spending?
Investors may calculate net capital spending for a company they invest in to make forecasts about the value of their investment, while business accountants or owners may calculate it to check the validity of their asset expenditure accounting. Learning about net capital spending can help you understand whether it would be useful in your situation.
