Module I· PP&E, Capex & D&AIntermediate
Question
What is the difference between 'net PP&E' and 'gross PP&E' — and which matters for valuation?
Answer
Gross PP&E
the acquisition / production cost of all tangible assets, accumulated since capitalization. Grows continuously with capex, falls only on disposals. Accumulated depreciation: cumulative depreciation over the assets' lives. Net PP&E (also 'carrying value' / 'book value'): gross PP&E − accumulated depreciation. This is the balance-sheet line item. Valuation relevance:
- Net PP&E in the balance sheet and 3-statement model — standard.
- Gross PP&E is useful for 'asset aging': net PP&E / gross PP&E shows how 'young' the asset base is. A ratio of 0.7+ → young asset base, little catch-up capex needed. A ratio < 0.3 → old asset base, deferred-maintenance risk.
- Replacement-cost estimate: gross PP&E × inflation factor since capitalization.
Deep diveShow more details
Example
Specialty Chemicals Co has gross PP&E 500, net 200 → aging ratio 0.4 → a moderately aged asset base, $50–80m of replacement need likely over the next 5 years.
Pitch tip
'Asset-aging analysis shows 60% of PP&E in the last 30% of its useful life — a capex wave of ~$80m over 3–5 years is expected; already priced into the forecast'.