Property, plant & equipment

Property, plant and equipment is the largest non-current asset on the balance sheet for most capital-intensive businesses. It represents the tangible long-lived assets a company uses to operate and generate revenue, including land, buildings, factories, machinery, vehicles, technology infrastructure, and leasehold improvements.

It is recorded at historical cost and then reduced over time by accumulated depreciation. The figure on the balance sheet is always net of depreciation already charged, meaning it reflects the remaining book value of the asset base rather than what those assets would cost to replace or what they could be sold for today. Land is the one exception as it is not depreciated, on the basis that it does not wear out or become obsolete.

The gap between gross PP&E and net PP&E, expressed as accumulated depreciation divided by gross PP&E, gives a rough sense of how aged the asset base is. A high ratio signals that existing assets are well into their useful lives and capital expenditure will likely be required to maintain or replace them. A low ratio suggests a relatively young asset base recently invested in.

Capital expenditure, disclosed on the cash flow statement, is the cash spent adding to or maintaining PP&E. The relationship between capital expenditure and depreciation is one of the most watched signals in capital-intensive industries. Capital expenditure consistently below depreciation suggests a company is harvesting its asset base rather than maintaining it, which flatters free cash flow in the short term but erodes productive capacity over time.

Following the introduction of ASC 842 under US GAAP and IFRS 16, operating leases are now capitalised on the balance sheet as right-of-use assets and presented within or alongside PP&E. This meaningfully inflated the asset base of businesses that rely heavily on leased real estate, aircraft, or equipment relative to how they appeared under the old lease accounting standards.