Net Capital Spending

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What is Net Capital Spending?

Net capital spending refers to the net amount the company spends to acquire the fixed assets during a period, which indicates the company's growth in the fixed assets. Usually, the expansion phase has a high net capital spending.

Table of contents

Net Capital Spending Formula

It can be calculated with the help of the below-mentioned formula:

Net Capital Spending = Ending Value of Net Fixed Assets - Beginning Value of Net Fixed Assets + Depreciation Expense for the Current Year

Net-Capital-Spending

Where,

  • Net fixed assets at the beginning of the period: To know the net capital spending during the year, the opening balance of the net fixed assets of the company like the plant, machinery, equipment, etc., at the beginning of the period is required. This information is taken from the financial statements of the company.
  • Net fixed assets at the end of the period: The value of the net fixed assets of the company at the end of the period is required. This information is taken from the financial statements of the company.
  • Depreciation expense for the year: Depreciation expense refers to the reduction in the value of the assets over some time due to normal wear and tear of the company's assets. The depreciation expense of the current year is added back to calculate the net capital spending during the year because the ending balance of the net fixed assets has been reduced with the year's depreciation expense.

Example

For example, at the beginning of the accounting year 2018, the value of net fixed assets of the company B ltd was $850,000, and at the end of the accounting year 2018, the value of net fixed assets of the company was $920,000. Therefore, the yearly depreciation expense of the company as charged in the income statement is $100,000.

Using the information, calculate the Net capital spending of the company.

Solution:

  • Beginning value of net fixed assets of the company: $850,000
  • The ending value of net fixed assets of the company: $920,000
  • Depreciation expense for the current year: $100,000
Net Capital Spending Example 1
  • = $920,000 - $850,000 + $100,000
  • = $170,000

Thus the Net capital spending of the company for the accounting year 2018 is $170,000.

Advantages

  • The value of the net capital expenditure provides light on the company's growth. A company with a faster rate of growth generally incurs a higher amount of net capital spending. In contrast, the company, which has a slower growth rate, typically has less or no net capital spending during the year. Thus it is essential to estimate the growth of the company.
  • The value of the net capital expenditure will help the company's stakeholders, including its investors, creditors, and management, get information about the company's financial health.

Disadvantages

  • In case the net capital spending of the company is high, then it shows that the company commits a vast amount of its money to capital expenditures. If the spending does not give the desired results, then the company might have to face huge losses and disturb the company's cash flows.
  • It requires the right level of planning and budgeting, without which the funds will go in vain.

Important Points

  • A company with a faster rate of growth generally incurs a higher amount of net capital spending. In contrast, the company, which has a slower growth rate, typically has less or no spending during the year. Thus the calculation of this spending is essential to estimate the company's growth.
  • It will be equal to zero if the decrease in the value of the company's net fixed assets is equal to its depreciation expense of the current year.
  • The depreciation expense of the current year is added back to calculate the net capital spending during the year because the ending balance of the net fixed assets has been reduced with the year's depreciation expense.

Conclusion

Thus the net capital spending of the company is increasing in its value of the net fixed assets during the year under consideration after adding the charge related to the depreciation expense of the current year. Therefore, it provides the light on the company's growth during the period, which will help the company's stakeholders, including its investors, creditors, and management, get the information about the company's financial health.