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Online Tutorial #5: How Do You Calculate A Company's Incremental Fixed Capital
Needs?
To understand what we mean by incremental fixed capital, let's break this phrase
down into its component parts:
• Incremental. This means that we want to look at the additional cash a company
annually invests in its long term operating assets.
• Fixed. This means we look at cash tied up in long term operating assets such as
property, plant, and equipment (PP&E) and capitalized leases.
• Capital. This is the amount of cash a company has spent annually in fixed
capital in order to run its business.
For industrial companies, then, incremental fixed capital equals the cash a company
invests annually in long term operating assets.
We can calculate a company's annual investment in fixed capital by analyzing its cash
flow statement. To calculate a company's gross fixed capital investments, we sum
the following items:
• Capital expenditures
Note: This data should be entered into the "Inputs" worksheet of the "Online Tutorial
5.xlsx" spreadsheet.
Building on this metric, we can calculate how much incremental fixed capital
Domino's must invest to generate a dollar of new sales:
Over this five year period, then, Domino's invested $189 million into its fixed capital in
order to generate $1.6 billion in incremental sales. In other words, Domino's invested
11.6% of incremental sales into fixed capital.