July 15, 2016

Overall, declining Net/Gross PP&E levels signal continued subdued growth for the US, but pockets of opportunity remain


The ratio of Net PP&E to Gross PP&E (property, plant, and equipment) is a useful metric to use to understand when companies have been “milking” their balance sheets or ramping up investment in the face of expected growth opportunities. When Net/Gross PP&E ratios dramatically rise (as they did in 2005-2007), it means that management teams are aggressively investing in their assets to drive growth. When Net/Gross PP&E levels fall, management teams are instead deferring maintenance capex and managing for higher free cash flows in the near term.

 

  • Management teams continue to be wary of investing in growth, even in the low interest rate environment.

 

  • That said, incremental interest rate hikes could actually spur more aggressive investments if management fears missing out on cheap financing for projects.
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