Projections for long-term assets are based on cash flow statement and income statement projections, because net PP&E and intangible assets on the balance sheet primarily increase due to capital expenditures and decrease due to depreciation and amortisation expenses. Capital expenditures can be broken down into maintenance capital expenditures necessary to sustain the current business and growth capital expenditures needed to expand the business. Maintenance capital expenditure forecasts are often based on historical depreciation and amortisation expenses, usually with a small adjustment upward to account for inflation in capital goods. For businesses with low fixed asset turnover, maintenance capital expenditure requirements can be quite high. Growth capital expenditure forecasts are more discretionary and are tied to management’s expansion plans and revenue growth. Depreciation and amortisation forecasts are based on net PP&E and intangibles on the balance sheet (which increase due to capital expenditures) and their useful lives as assumed by management’s accounting policies, which can be approximated by the ratio of gross fixed assets to depreciation and amortisation expenses. Information may also be found in the notes to the financial statements.
