Net Investment

AAA

DEFINITION of 'Net Investment'

The amount spent by a company or an economy on capital assets, or gross investment, less depreciation. Net investment helps give a sense of how much money a company is spending on capital items (such as property, plants and equipment), which are used for operations. Subtracting depreciation from this amount, or capital expenditure (since capital assets lose value over their life because of wear and tear, obsolescence, etc.), provides a more accurate picture of the investment's actual value. Capital assets include property, plants, technology, equipment and any other assets that can improve the productive capacity of an enterprise.

INVESTOPEDIA EXPLAINS 'Net Investment'

If gross investment is consistently higher than depreciation, net investment will be positive, indicating that productive capacity is increasing. Conversely, if gross investment is consistently lower than depreciation, net investment will be negative, indicating that productive capacity is decreasing, which can be a potential problem down the road. This is true for all entities, from the smallest companies to the largest economies.

Net investment is therefore a better indicator than gross investment of how much an enterprise is investing in its business, since it takes depreciation into account. Investing an amount equal to the total depreciation in a year is the minimum required to keep the asset base from shrinking. While this may not be a problem for a year or two, net investment that is negative for a prolonged time period will render the enterprise uncompetitive at some point.

A simple example will show how net investment is calculated. Suppose a company spends $1 million on a new machine that has an expected life of 30 years and has a residual value of $100,000. Based on the straight-line method of depreciation, annual depreciation would be $30,000 (i.e. {$1,000,000 - $100,000} / 30). Therefore, the amount of net investment at the end of the first year would be $970,000.

Continued investment in capital assets is critical to an enterprise's ongoing success. The net investment amount required for a company depends on the sector it operates in, since all sectors are not equally capital intensive. Sectors such as industrial products, goods producers, utilities and telecommunications are more capital-intensive than sectors such as technology and consumer products. Therefore, comparing net investment for different companies is most relevant when they are in the same sector.

RELATED TERMS
  1. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
  2. Non-Cash Charge

    A charge made by a company against earnings, which does not require ...
  3. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  4. Capital Asset

    A type of asset that is not easily sold in the regular course ...
  5. Property, Plant And Equipment - ...

    A company asset that is vital to business operations but cannot ...
  6. Capital Budgeting

    The process in which a business determines whether projects such ...
RELATED FAQS
  1. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Fundamental Analysis

    Discounted Cash Flow Analysis

    Find out how analysts determine the fair value of a company with this step-by-step tutorial and learn how to evaluate an investment's attractiveness for yourself.
  3. Investing Basics

    Capital Budgeting

    Learn the process through which businesses determine whether projects are worth pursuing.
  4. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  5. Investing

    Using DCF In Biotech Valuation

    Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential.
  6. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  7. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  8. Personal Finance

    An Introduction To Capital Budgeting

    We look at three widely used valuation methods and figure out how companies justify spending.
  9. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  10. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...

You May Also Like

Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center