Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Gross Property, Plant, and Equipment (PP&E)====== Gross Property, Plant, and Equipment (PP&E) is the total, original purchase price of all a company's long-term [[Tangible Assets]] before any reduction for wear and tear. Think of it as the sticker price for all the physical stuff a company owns to run its business, such as: * Land and buildings * Factories and warehouses * Machinery and equipment * Vehicles, furniture, and office computers This figure is a key line item on the company's [[Balance Sheet]], though sometimes you may need to dig into the footnotes to find the exact number. It's the //before// picture. The //after// picture, which accounts for the accumulated wear and tear ([[Accumulated Depreciation]]), is called [[Net Property, Plant, and Equipment (PP&E)]]. By looking at the gross figure, investors get an unfiltered view of the total capital a company has historically invested in its physical infrastructure. This provides a crucial baseline for understanding the scale and nature of a business. ===== A Value Investor's Toolkit ===== For the savvy value investor, Gross PP&E isn't just a boring accounting figure; it's a versatile tool for peeking under the hood of a business. It helps you answer critical questions about a company's business model, its true costs, and its future spending needs. ==== Uncovering a Company's DNA: Capital Intensity ==== Is this a business that needs giant, expensive factories, or can it operate from a laptop? Gross PP&E tells you. A high Gross PP&E relative to sales suggests a "capital-intensive" business, like a steel mill or an airline. These businesses constantly need to pour cash into maintaining and upgrading their expensive assets, which can be a major drain on cash. A low Gross PP&E relative to sales points to a "capital-light" business, like a software company or a consulting firm. Legendary investor [[Warren Buffett]] famously prefers capital-light businesses because they can grow without massive ongoing investment, freeing up cash to be returned to shareholders. This is a critical factor in a company's ability to generate strong [[Free Cash Flow (FCF)]]. ==== Detective Work: Estimating Maintenance Costs ==== Companies report a single number for [[Capital Expenditures (Capex)]], lumping together money spent on simply maintaining the business ([[Maintenance Capital Expenditures (Capex)]]) and money spent on expanding it ([[Growth Capital Expenditures (Capex)]]). For a value investor, separating these two is //vital//. Maintenance capex is a true cost of doing business, while growth capex is a discretionary investment in the future. Columbia Business School professor [[Bruce Greenwald]] highlighted a brilliant shortcut using Gross PP&E. You can get a rough estimate of maintenance capex by looking at the prior year's [[Depreciation]] figure. This simple check helps you calculate a more realistic "owner's earnings" by subtracting the true cost of staying in business from reported profits. ==== Reading the Tea Leaves: Asset Age and Future Spending ==== By comparing Gross PP&E to Net PP&E, you can get a rough estimate of the age of a company's assets. The relationship can be expressed as: Accumulated Depreciation / Gross PP&E. A high ratio (say, over 60-70%) suggests the company's asset base is old and may soon require significant investment for replacement. This could signal a wave of heavy capital spending just around the corner, which will eat into future cash flows. Conversely, a low ratio suggests a newer asset base with a longer useful life. This quick check can help you avoid companies that look cheap today but are about to face a massive bill for overhauling their aging infrastructure. It also provides a starting point for thinking about a company's [[Replacement Cost]]—what it would cost to rebuild the business from scratch today.