In this article, we are going to see what Net Fixed Assets are and the concepts of CAPEX and Depreciation, and we will learn how to calculate each one.
What are Net Fixed Assets?
Net Fixed Assets are a metric that represents the net book value of all fixed assets on our balance sheet and allows us to calculate the residual value of the asset.
How to calculate Net Fixed Assets?
To calculate the Net Fixed Assets of a company we must subtract the amortization from the acquisition and maintenance costs. If we add the above to the net fixed assets that the company had at the beginning of the period, we will obtain the net fixed assets at the end of the year.
- (+) NFA BoP (Net Fixed Assets Beginning of Period): are the net fixed assets that the company has at the beginning of the period.
- (+) CAPEX (Capital Expenditures): is the investment made by the company in fixed assets, either for the purchase of new assets or for the costs of repairing or improving assets it already has.
- (-) Depreciation: is the amortization of assets.
- NFA EoP (Net Fixed Assets End of Period): are the net fixed assets that the company will have at the end of the period.
How to integrate each concept in the Financial Statements?
- NFA BoP: is given by the NFA at the end of the previous exercise.
- CAPEX: they will normally mean a cash outflow, so it will appear in the Cash Flow for Investments (CFI) with a negative sign. In the case of selling an asset, it will represent an entry, so even if the total NFA is reduced, it would represent a cash inflow.
- Depreciation: supposes a reduction of the NFA that will be reflected in the P&L as an expense.
- NFA EoP: they are the sum of the three previous concepts and will be directly integrated into our Balance.
How to interpret each concept?
- If the accumulated depreciation represents a high percentage of our assets, it will usually mean that it is old and has not been replaced in a long time.
- Accelerated depreciation must be taken into account, which will allow some assets to be depreciated faster than normal, so we must take into account the differences between accounting and tax depreciation.
- A fully amortized asset does not mean that it is no longer useful, in fact, they usually continue to be used once it is fully amortized.
- Investors pay close attention to net fixed assets to determine when the next equity investment will need to be made (CAPEX, long-term).
- When the company has a negative Cash Flow due to the acquisition of fixed assets, it will indicate that it is in a growth phase.
- The calculation of Net Fixed Assets also allows investors to know how efficient is the use of assets in the company and the return per asset