Lesson 3 of 8
Capacity you can count
Money spent is not capacity added. Property, plant and equipment, the additions behind it, and the years between a payment and anything being produced.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Net property, plant and equipment is a stock; capital expenditure is a flow; and the gap between them is depreciation plus disposals.
- Money spent this year becomes capacity available some later year, and the filing does not say which year.
- A rising asset base with flat output is a readable fact, and the several reasons for it are not all the same reason.
The cycle track's central claim is about capacity being added at stages away from the consumer. Capacity is not a reported line. Property, plant and equipment is, and the distance between the two is worth being exact about.
One filer's net property, plant and equipment, four filed years
- FY201614,686$m
- FY201719,431$m
- FY201823,672$m
- FY201928,240$m
Three numbers, three meanings
Net property, plant and equipment is what remains on the balance sheet after accumulated depreciation, at one instant. It is a stock.
Capital expenditure is payments for such assets during the period. It is a flow, and it appears in the investing section of the cash flow statement.
Depreciation is the charge that reduces the stock, and it appears in the income statement and again as an add-back in operating cash flow. The identity is approximate but useful: closing net asset base equals opening, plus additions, less depreciation, less the book value of anything disposed of or written down.
Where the closing stock rises faster than additions would suggest, something has been acquired or capitalised; where it rises more slowly, disposals or impairments have happened. Both are disclosed, and both are worth finding before concluding anything from the direction.
Money spent is not capacity available
This is the part the theory's own vocabulary makes vivid and the accounts do not show at all. A payment for a long-lived asset buys capacity that becomes available at some later date, and how much later depends entirely on what was bought. A filing reports the payment in the year it was made. It does not report the date the asset starts producing, and for a large project it does not report the completion date either.
Construction in progress, where a filer discloses it separately, is the closest thing to a signal and it is a partial one: it says how much is committed and not yet in service, and it says nothing about when.
What a rising base with flat output means
It is a readable fact and it has at least four explanations. Capacity has been added and has not yet come into service. Capacity has come into service and is not being used. The asset mix has changed towards more expensive assets producing the same output. Or an acquisition brought assets and their output is reported somewhere the reader is not looking.
Only the first two are what the theory is about, the filing does not distinguish them, and the next lesson gives the inventory reading that sometimes does.
Check yourself
What is the difference between net property, plant and equipment and capital expenditure?
- One is gross and the other net of tax
- The first is a stock at an instant and the second a flow during a period, and depreciation and disposals sit between them
- They are the same figure reported in two statements
Show the answer
Answer: B.
Closing net asset base is roughly opening plus additions less depreciation less the book value of disposals and write-downs.A filer pays 23,393 million over three years and its net asset base rises 13,554 million. What accounts for the difference?
- An error in one of the statements
- Depreciation, disposals and any write-downs, which reduced the stock while the payments were adding to it
- Capitalised interest
Show the answer
Answer: B.
The stock is net of accumulated depreciation, so the flow in and the change in the stock are never expected to agree.Why can a filing not tell you when capacity becomes available?
- Because the date is commercially sensitive
- Because it reports the payment in the year it was made and does not report when the asset enters service
- Because capacity is reported only in the annual report
Show the answer
Answer: B.
Construction in progress is the closest disclosure and it says how much is committed and not in service, not when it will be.Sources
- Micron Technology, Inc., annual reports on Form 10-K for fiscal years 2016 through 2019, for net property, plant and equipment and for payments to acquire property, plant and equipment: fiscal 2016 accession 0000723125-16-000269; fiscal 2017 accession 0000723125-17-000131; fiscal 2018 accession 0000723125-18-000092; fiscal 2019 accession 0000723125-19-000094.
- ASC 360, Property, Plant, and Equipment, for capitalisation, depreciation and the effect of a change in estimate.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The reconciliation between the stock and the flow above is approximate. Acquisitions, disposals, impairments and currency translation all move the asset base and the lesson does not separate them.
- No filing reports capacity in units a customer buys. Everything here is a statement about carrying values and payments.
- Nothing here is a view on Micron or on any security.