ABB plans steady capital spending as data-centre orders surge

ABB says annual capital expenditure is already at a higher level of around $1 billion and it does not expect another increase over the medium term. That statement accompanied its 20 October results: third-quarter orders reached $12.055 billion, up 40% from a year earlier, with data-centre orders rising at a triple-digit rate.[1]

Its proposed route to more output combines incremental capacity expansion, automation, productivity improvements and selective use of third-party assembly. The attraction is straightforward: additional sales are more valuable when they require less additional capital.[1]

Growth has a reinvestment bill

NYU finance professor Aswath Damodaran relates operating-earnings growth to the share of after-tax operating earnings reinvested and the return on that capital. With a stable return, multiplying them gives growth. Reinvestment includes net capital spending and additional non-cash working capital, beyond the factory budget alone.[3]

Consider our illustrative business earning $100 million after tax on its operations. At a 20% return on new capital, reinvesting $40 million would support $8 million of additional annual operating earnings. At a 10% return, producing the same increase would require $80 million. The growth is identical; the cash left after reinvestment is $60 million in the first case and $20 million in the second. These are simplified calculations, with stable returns and no financing flows, not ABB forecasts.[3]

That difference matters before anyone debates the next share-price move. Money retained after reinvestment can support debt reduction, distributions or another investment. A company can report rapid growth while consuming most of the cash needed to sustain it. Equally, a mature production network may have room to deliver more without being rebuilt from scratch.

Follow the capital as well as the orders

ABB reported a 29.9% return on capital employed. It divides trailing-year adjusted operating earnings after a notional tax charge by four-quarter average capital employed, comprising adjusted fixed assets and net working capital. This measures the group’s existing operations.[2]

Damodaran warns that returns on existing assets may differ from those on new projects. Book values, depreciation and competition complicate the comparison. Past returns therefore cannot establish the economics of the next factory expansion.[3]

For the AI economy, this shifts attention towards the amount of capital each participant must commit to earn the next dollar. The company buying a server campus and the company supplying its electrical equipment can share the same demand boom while facing very different reinvestment demands.

Report an error or suggest a correction