The Net Capital Spending Formula: What It Is and How To Calculate It (+ Examples)

Drew Robertson

Last updated on Jun 10, 2025

With contribution from

Ritoban Mukherjee

TABLE OF CONTENTS What Is Net Capital Spending? The Net Capital Spending Formula How To Calculate Net Capital Spending Good vs. Bad Net Capital Spending Additional Formulas Tips for Calculating Net Capital Spending

Key Takeaways

Net capital spending measures a company's total amount spent on fixed assets in a particular period. It's designed to help investors and financial analysts determine a business's overall cash flow and financial health.

To determine net capital spending, you need to find your ending net fixed assets, beginning net fixed assets, and depreciation amounts.

A good net capital spending total is between 1.2 and 2.0. However, many other factors are taken into consideration when determining net capital, such as your business size, industry, and growth state, which can also impact your net capital spending total.

Net capital spending (also known as Net CapEx or net capital expenditure) is a key financial forecasting valuation that helps investors spot long-term growth opportunities and get a feel for how healthy a company’s operating cash flow really is.

That said, figuring out the true cost of long-term assets isn’t always easy. Between depreciation, tax implications, and scattered data, it can feel like putting together a very expensive puzzle.

As a financial controller with hands-on experience managing capital budgets and navigating the ins and outs of financial operations, I know how tricky this can get. That’s exactly why I put this guide together.

In the pages ahead, I’ll walk you through what net capital spending actually means, how to calculate it step by step, and how it fits into the bigger CapEx picture. Ready to dive in? Let’s get started!

What Is Net Capital Spending?

Net capital spending (NCS) is a common way to measure the money that companies spend on long-term assets in a given time frame. It’s often used during performance evaluations and financial forecasts, to see how aggressively a business invests in fixed assets like machinery and real estate (PP&E).

NCS is one of many ways financial analysts and investors look at CapEx (capital expenditure); another version is the ROIC formula, which determines your return amount on invested capital.

While CapEx is used across several industries, it’s mainly ideal for businesses in asset-heavy industries like manufacturing, telecom, and fossil fuels, as it helps to inform decisions about acquiring and upgrading equipment or expanding to new facilities.

Using the Net Capital Spending Formula

The net capital spending formula is as follows:

Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

NCS looks at three things: Beginning Net Fixed Assets, Ending Net Fixed Assets, and Depreciation.

Ending Net Fixed Assets: This is the total value of your company’s fixed assets at the end of the reporting period. It’s a final snapshot of what the company owns right now.
Beginning Net Fixed Assets: This is what the company invested in fixed assets at the start of the current period. By subtracting it from the ending net fixed assets, you can see how much the value has changed over time.
Depreciation: This is the value that the assets have lost due to wear and tear. It applies especially to things like machinery and equipment, which need regular maintenance and decrease in efficiency as they get older.

Knowing exactly what the formula entails will help you ensure that you get an accurate output for your financial statements during reporting periods.

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How To Calculate Net Capital Spending

Net capital spending helps businesses find patterns in a company’s growth trajectory and investment patterns through financial analysis. Calculating it involves going through three separate steps:

1. Find Beginning and End Net Fixed Assets

Before you use the net capital spending formula, you'll need to know the amount of your beginning and end net fixed assets. The formula for net fixed assets goes like this:

Net Fixed Assets = (Total Fixed Assets + Capital Improvements) - Accumulated Depreciation

Here's a breakdown of how to find each of these numbers:

Total Fixed Assets: Identify all your fixed assets for each period and add together their total costs. This can include building fees, machinery purchases, etc.
Capital Improvements: Identify and classify expenses not considered routine repairs or maintenance on your fixed assets for each period. Only account for expenses that increase value or the lifecycle of an asset. This can include renovations, equipment upgrades, and land improvements.
Accumulated Depreciation: Find your annual depreciation amount. Then, multiply this number by the number of years you've used your asset.

By tracking changes in the value of your net fixed assets, you can get a clear idea of how aggressively you have invested over the accounting period. You’ll need to do this twice, for the beginning, as well as the end of the accounting period.

Let's say that Sunrise Manufacturing wants to calculate its net capital spending for 2024. First, they have to find the amount for their total fixed assets, capital improvements, and accumulated depreciation amounts. After many calculations, this was the outcome:

	Jan 1, 2024 ($)	Dec 31, 2024 ($)
Total Fixed Assets	850,000	950,000
Capital Improvements	50,000	70,000
Accumulated Depreciation	300,000	380,000

Next, they will input these numbers into the formula to receive the total net fixed asset amounts:

Beginning Net Fixed Asset (Jan 1, 2024): $600,000
End Net Fixed Asset (Dec 31, 2024): $640,000

2. Determine Annual Depreciation

With long-term investments like vehicles, machinery, and equipment, your assets often lose a part of their value over time due to things like wear and tear, obsolescence, or market changes. If you don’t factor this in when calculating net capital spending amounts, your calculations won’t be accurate.

To calculate annual depreciation, you’ll use the following formula:

Annual Depreciation = Depreciable Base / Depreciation Rate

This formula is made of two components:

Depreciable Base: The total cost of an asset minus its estimated salvage value, representing the amount that can be depreciated over its useful life.
Depreciation Rate: The percentage of an asset’s depreciable value (cost minus salvage value) that is allocated as depreciation expense each year.

To find your depreciable base, you'll need to subtract the estimated salvage value from your asset's original cost. For the depreciation rate, you'll need to divide the number of usage years for your assets by 1, and then multiply that number by 100.

To help illustrate this further, I’ll continue with the example of Sunrise Manufacturing from earlier.

Let’s say Sunrise Manufacturing is looking for the annual depreciation for their manufacturing equipment, factory building, and delivery vehicles. Here’s a breakdown of the cost, salvage value, and lifespan of each type:

Asset	Original Cost ($)	Salvage Value ($)	Useful Life (Years)	Depreciable Base ($)	Depreciation Rate	Annual Depreciation ($)
Manufacturing Equipment	500,000	50,000	10	450,000	0.10	45,000
Factory Building	300,000	100,000	20	200,000	0.05	10,000
Delivery Vehicles	150,000	30,000	5	120,000	0.20	24,000

As you can see, their manufacturing equipment costs $500,000 with a salvage value of $50,000 and lifespan of 10 years. Using the guidelines above for depreciable base and depreciation rate, their total depreciation rate is 0.10%, with a depreciable base of $450,000.

With these numbers, they can then calculate their annual depreciation amounts using the formula above to receive a total annual depreciation of $45,000 for their manufacturing equipment. This process will then again be repeated for their factory building and delivery vehicle assets.

Document Your Assets

Maintain a depreciation schedule for all your fixed assets. Make sure to include the purchase date, asset cost, salvage value, useful life, depreciation method, and accumulated depreciation to date. This will make calculating total depreciation faster and easier.

3. Calculate With the Net Capital Spending Formula

After you’ve got both the fixed asset values along with the depreciation expense, you can then use the formula from earlier to calculate your net capital spending.

Here’s the formula again, for ease of use:

Net Capital Spending = (Ending Net Fixed Assets - Beginning Net Fixed Assets) + Depreciation Expense

For Sunrise Manufacturing, they would take the following amounts to find their net capital spending:

Description	Amount ($)
Ending Net Fixed Assets	640,000
Beginning Net Fixed Assets	600,000
Depreciation Expense	79,000

After using the net capital spending formula, Sunrise Manufacturing would come to a final amount of $119,000.

Handling Depreciation

You might wonder why we subtract depreciation from net fixed assets but then add it back when calculating net capital spending. That’s because depreciation decreases our ending net fixed asset value. Yet, it doesn’t represent an actual cash outflow in the balance sheet. Adding it back helps us reverse this accounting cut. That way, we can see the real capital spending.

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Good vs. Bad Net Capital Spending

Net capital spending plays a very important role during performance evaluations, especially for businesses in asset-heavy industries like manufacturing or energy. But what’s the difference between good and bad net capital spending?

Most businesses follow the ideology that a strong net capital spending ratio is between 1.2 and 2.0. A ratio greater than 1 indicates that you can afford your capital expenditures and are on track for solid growth. However, anything less than 1 may show the opposite.

But this is where things get complicated. While this is the standard practice number, several factors can impact your net capital spending ratio, including:

Your business size
Your industry
Your current growth state
Your overall financial health

For example, if your capital spending is too small, it could indicate a growth deficit. But, if capital spending is high but disproportionate to revenue growth, this could signal that the company is taking more risks than necessary—especially if the investing activities are funded by bad debt or holding up your free cash flow.

There’s also a situation where a business could end up with net zero capital spending. This usually happens when a company is mature and stable, but has limited growth opportunities going forward. So it’s only replacing aging assets as they go out of order, but not investing in new operations.

Great companies do not need to reinvest a lot of profit back into the business to grow. It’s a great sign when capital expenditures are less than 25% of net income.

Dave Ahern

Personal Banker, Wells Fargo

It’s also important to remember that looking at a company’s net capital spending by itself tells you nothing. It’s only when you put it into context within the larger balance sheet and business industry that the patterns start to make sense.

The Net Capital Spending Formula for Capital Budgeting

So far, I've explored to calculate net capital spending by looking at asset costs minus depreciation. But did you know that there's another formula for capital budgeting?

Net Capital Spending = Initial Investment + After-Tax Salvage Value

Here, the initial investment is the total cost of starting the project. And the after-tax salvage value is the market price you can fetch for the capital assets after taxes, assuming it will be sold later. Basically, this helps you forecast total cash flow for a project, while also helping companies look at different investment options and identify the ones with the best returns.

For example, if Sunrise Manufacturing was looking at a new production line with an initial investment of $500,000 and an after-tax salvage value of $100,000, this would be their approach using this formula:

$500,000 + $100,000 = $600,000

Once you have this value, the next step is to calculate the project's Net Present Value (NPV) and Initial Rate of Return (IRR). That will help you decide if the project is worth the financial risk.

Tips for Calculating Net Capital Spending

Net capital spending is a key metric for measuring your company's financial health and long-term growth potential. Here's what you can do to make it easier to calculate and report on your net capital spending:

1. Integrate NCS Into Your Financial Strategy

Net capital spending ties up a company's cash flow, so it's important to make it a part of your regular budgets. Make sure that your long-term asset costs don't hold up immediate necessities like payroll or rent.

By integrating NCS into your financial strategy, you can:

Create alignment between capital investments and long-term business goals
Allocate financial resources efficiently across the business
Better forecast and manage your cash flow
Make better decisions regarding growth initiatives

2. Account For Lifetime of Purchased Items

Knowing an asset's useful life can make a big difference to your balance sheet calculations. Anything with less than a year of useful life isn't relevant to your net capital spending because it has a depreciation rate of 100%, effectively canceling out its purchase cost.

Short-term vs Long-term

Short-term asset investments fit better as expenses on the income statement than the net capital spending calculation. But for anything with more than a year’s worth of shelf life, you can put that in as a long-term asset.

3. Compare Cash Flow to Capital Expenses

There's not much you can infer about a company's finances by looking at your net capital expenses alone. But if you compare it to your cash flow (which is located on your cash flow statement), it will give the numbers some much needed context.

For example, Sunrise Manufacturing has annual capital expenses worth $119,000 but generates a cash flow of $250,000. This suggests that they can comfortably fund their investments with a ratio of 2.0.

If your capital expense to cash flow ratio is less than 1.0, there's a good chance that your investments are unsustainable.

4. Look At The Industry

What's considered aggressive capital spending for one industry, could be completely par the course for another. That's because some industries, like energy, need a ton of equipment and machinery to refine and transport fossil fuels.

Similar industries with high capital expenses include real estate, manufacturing, air transportation, and so on. Compared to that, service-based businesses and software firms have minimal asset costs in the long run.

5. Use Software To Forecast and Budget

Budgeting, financial forecasting, and corporate performance management tools all make it easier to analyze capital expenses. Together, they help monitor, budget, allocate, and analyze long-term asset costs.

You can use them to create detailed performance evaluations, multi-year budget forecasts, and reports on the company cash flow. There are other uses too, like:

Standardizing submission and approval processes
Collaborating across business units
Modelling assumptions that impact financial viability
Creating and comparing what-if scenarios
Tracking variances against approved budgets

Some popular platforms include Anaplan, Phocas, and Rippling Spend. But if you're unsure where to start in your search, consider taking a look at some of my top financial modelling software options:

1. CRM Creatio — Best for comprehensive budgeting
2. QuickBooks — Best for live expert assistance
3. Quicken — Best for business and personal financial management
4. Xero — Best for discounted pricing
5. Sage Intacct — Best for multi-entity management
6. Acumatica — Best for industry-specific ERP solutions
7. Mosaic — Best for quick FP&A implementation
8. Workday Financial Management — Best for AI-driven financial insights

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