What is net capital spending?


Net capital spending is the overall annual expenditure, which was allocated at buying fixed assets. Net capital expenses can be can be calculated by subtracting depreciation and fixed assets in the start of the year from assets in the end.


Cash flows attributable to the company are calculated after reinvestment. When evaluating reinvestment, two components are taken into account. The first is net capital spending, that is, the difference between capital spending and reinvestment and another is investment in non-cash working capital. In assessing net capital spending and financial statements, it typically subtracts depreciation from capital spending.

The rationale is that the positive cash flows from the depreciation charge pay at least part of the capital spending, and the leakage of cash flows of the company is only an excess. Although information on average capital costs and depreciation is usually readily available in financial statements, predicting these costs can be difficult for three reasons.

The first is that firms often make capital expenditures in large portions – a large investment in one year may be replaced by small investments in subsequent years.

The second reason is that the accounting definition of capital expenditures does not include capital expenditures, which are considered operating expenses. When firms extract assets, they can generate capital gains. Infrequent exemptions can be regarded as one-off items and can be neglected. However, some firms withdraw assets on a regular basis. For such firms, it is better to ignore the income from the exemptions, but take into account the cash flows associated with them and the net capital expenses of taxes when assessing net capital spending.

The third reason is that acquisitions are not classified by accountants as capital expenditures. For firms whose growth occurred mainly through acquisitions, this would lead to an underestimation of net capital spending. Borrowing costs directly attributable to the acquisition, construction or production of an asset, unless the asset is carried at fair value and the preparation of which for its intended use or for sale requires a significant amount of time. The company capitalizes borrowing costs that could have been avoided if it had not incurred capital expenditures on qualifying assets.

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