CALCULATING CAPITAL EXPENDITURES THAT IS DEDICATED TO GROWTH

Capital expenditures dedicated to growth can be calculated as below in the following three steps (from Value Investing: From Graham to Buffett and Beyond (Hoboken, NJ: John Wiley & Sons, 2001) :

  1. Calculate the ratio of gross property, plant, and equipment (PPE) to sales for each of the past 5 years and find the average;
  2. Use this to indicate the dollars of PPE it takes to support each dollar of sales;
  3. Multiply this ratio by the growth (or decrease) in sales dollars the company achieved in the current year

It could be useful when comparing two companies from the same industry.

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