Financial Analysis: Gross Block and CAPEX

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Financial Analysis

Now, it is time to gain an understanding of what we are facing. We should inspect the assets side of the balance sheet for any discrepancies.

The Gross block is a considerable element on the asset side of a balance sheet, particularly in manufacturing companies. We also used it extensively in balance sheet assumptions.

Financial Analysis

It would be wise to have a more thorough comprehension of Gross block, considering its gravitas. I propose that you try this activity –

  • Choose a business and investigate its yearly financial documents.
  • Review the balance sheet, inspect the asset side, and observe the Gross block.
  • Pay attention to the corresponding note number
  • Take note of the information provided in the notes.

What do you observe?

  • Gross block is another term for ‘Property, plant, and equipment.’
  • Gross block is typically the most significant item on the asset side.
  • Many businesses could present gross block, subtract depreciation, and then provide the net block.
  • Therefore, it is rare that a company will report the net block directly.

The associated notes provide a thorough breakdown of the gross block, giving you an understanding of the makeup of this line item. Typically, it contains all pertinent information connected to a company’s possessions.

  • Land (freehold and leasehold)
  • Improvements for leasehold lands
  • Buildings
  • Plant and machinery
  • Computer hardware
  • Factory equipment
  • Electric fittings
  • Vehicles (including aircraft)
  • Maintenance and repair works

The items mentioned here fall under the category of ‘CAPEX’ or capital expenditures. So, what exactly is CAPEX?

Financial Analysis

Capital expenditure, or CAPEX, is allocated by firms to invest in, upgrade and keep their physical assets, such as buildings and equipment, in good condition. For instance, if an office roof leaks, the money used for repairs would be stated as a CAPEX.

Suppose a company in the manufacturing sector wants to build a new plant. In that case, they need to set aside capital expenditure for acquiring or leasing land and procuring the necessary equipment and machinery needed to run it.

Financial Analysis

Certain companies may accept projects whose capital expenditure is spread out over multiple years, depleting their sources of finance. However, they do this with the hope that the rewards from the venture in future surpass today’s financial outlay.

Capital expenditure may occur over different time periods; this is generally referred to as a business’s CAPEX cycle.

Financial Analysis

As an analyst, it is essential to assess if the company has embarked on a CAPEX cycle of expansion or simply running maintenance CAPEX. Analyzing why the organization embarked on an expansion, the ways in which such investments have been made and whether the payoff is likely to exceed current cash burn are all integral components of this evaluation.

While the company’s CAPEX is largely maintenance-related, you must decide whether these expenses can be sustained yearly.

– How To Estimate CAPEX?

Previously, we discussed Ola setting up their manufacturing operations with a CAPEX plan of 500Cr for year 1. That amount was used to acquire land, machinery, equipment and any other assembly lines necessary. This is also the same as Ola’s gross block.

What is Ola’s gross block at the start and end of the day?

We can deduce that year 2’s opening balance is the closing balance of year 1 plus an additional 100Cr worth of CAPEX.

So, what do you make of the Year 3 closing balance and the opening balance for Year 4 when Ola does not invest in Capex but disposes off machinery worth 50Cr?

To understand the calculation of the opening and closing balance of the gross block, take note of the opening balance for Year 4, which is equal to the closing balance for Year 3.

When you examine a company’s balance sheet, the gross block (or property, plant, and equipment) number is listed. CAPEX is not stated on the balance sheet; for example, the gross block numbers in our current model are as follows

These figures are a fine place to begin creating the asset schedule.

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