Net Investment

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.



comments powered by Disqus
Hot Definitions
  1. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  2. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  3. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  4. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  5. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  6. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
Trading Center