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What is a Net Investment?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 28 September 2016
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Net investment is a reflection of the amount of money a company is spending to finance its operations. Net investment is determined by subtracting depreciation from capital expenditure. Businesses are interested in promoting active growth, and net investment is an important part of growing over time. Companies which do not invest in their operations can become inefficient, unable to adapt, or trapped behind the rest of the market. On the other hand, companies which invest too much money in their operations can suffer from poor liquidity and may not be as financially flexible.

Capital expenditure (CAPEX) is a term used to describe spending which is designed to improve a company in some way. This includes expenses associated with acquiring real estate, upgrading or replacing equipment, and others. These expenses are a part of doing business and are a literal example of the adage "you have to spend money to make money." Depreciation refers to the losses which occur over time as a result of wear and tear, leading to an eventual devaluation of assets.

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Net investment increases the means of production for a company, making it possible to expand operations and improve efficiency. In the short term, it may involve substantial costs, but these costs are designed to make money for the business in the long term. Companies which neglect net investment may encounter problems in the future when they are forced to replace outdated systems all at once or are obliged to expend substantial amounts in a given year to catch up on prior years.

Subtracting depreciation from capital expenditure allows companies to see how much money they are spending on operations after the losses associated with maintenance, wear and tear, and routine expenses. This amount can vary considerably depending on the company and the industry, and in any given year it can fluctuate in response to numerous factors. Net investment is documented along with other financial information on statements and disclosures associated with the company's operations.

Internally, financial documentation is used to make decisions about business activities and future investments. It can also be used to track progress, to identify weak points in the company's operations, and for many other tasks. Publicly traded companies make such disclosures available to their shareholders and other interested members of the public. Investors use this information to make decisions about which companies to invest in and how to distribute their investments.

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