Capital expenditures, or CapEx, refer to the money a company spends to buy, improve, or keep up physical assets like land, factories, buildings, tech, or machinery. Companies typically use CapEx to kick off new projects or make investments. For example, spending on capital expenditures might involve fixing a roof to extend its lifespan, buying new equipment, or constructing a new manufacturing facility.
Businesses make these kinds of financial investments to expand their operations or to secure future economic advantages.
Learn more about CapEx
CapEx gives you a peek into how much a company is putting into its existing and new fixed assets to keep things running or to expand. It covers any expenses that a company treats as investments on its balance sheet instead of just regular costs on its income statement. When a company capitalizes an asset, it means they’ll spread out the cost over the asset’s useful life.
The level of capital expenditures varies by industry. Some sectors, like oil exploration, telecommunications, manufacturing, and utilities, are known for being particularly capital-intensive, meaning they rack up higher CapEx.
You can find CapEx listed under cash flow from investing activities in a company’s cash flow statement. Companies might refer to it in different ways, such as capital spending, purchases of property, plant, and equipment (PP&E), or acquisition costs.
If you want to calculate capital expenditures, you can use info from the income statement and balance sheet. Start by checking the depreciation expense for the current period on the income statement. Then, look at the property, plant, and equipment line on the balance sheet for the current period.
Next, find the PP&E balance from the previous period. The difference between the two balances will show you the change in PP&E. Finally, add that change to the current period’s depreciation expense to figure out the company’s CapEx for that period.
Calculation of CapEx
CapEx = ΔPP&E + Current Depreciation
where:
CapEx = Capital expenditures
ΔPP&E = Change in property, plant, and equipment
Capital expenditures play a role in figuring out free cash flow to equity (FCFE), which represents the cash that’s left for equity shareholders. The FCFE formula is:
FCFE = EP−(CE−D)×(1−DR)−ΔC×(1−DR)
where:
FCFE = Free cash flow to equity
EP = Earnings per share
CE = CapEx
D = Depreciation
DR = Debt ratio
ΔC = ΔNet capital, change in net working capital
It can also be figured out like this:
FCFE = NI−NCE−ΔC+ND−DR
where:
NI = Net income
NCE = Net CapEx
ND = New debt
DR = Debt repayment
Example of CapEx
When a company buys a vehicle to expand its fleet, that purchase is usually considered a capital expenditure (CapEx). The vehicle’s cost gets spread out over its useful life through depreciation, and it shows up on the company’s balance sheet right away.
On the other hand, operating expenses (OpEx) work differently. For example, filling up the gas tank is an immediate expense since the gas doesn’t last long for the company. So, that cost gets recorded right away as OpEx.
Conclusion
Capital expenditures, or CapEx, are the investments a company makes that get recorded on the balance sheet instead of being fully deducted right away. These capitalized assets can be spread out over their useful life and depreciated over time. By looking at CapEx, you can see how much a company is putting into both its current and new fixed assets to keep things running smoothly or to expand its operations.