Capital Expenditure (CapEx) Meaning, Formula, and Example
CapEx is short for Capital Expenditure. It is a key financial metric used by analysts to understand a company's investment behavior. Read along to learn in detail what capital expenditure means and how to calculate CapEx. Discover its different types and understand how CapEx is different from revenue expenditure.
What is Capital Expenditure?
CapEx represents the money a company invests to acquire or upgrade fixed or non-consumable assets. These expenditures are essential for purchasing, enhancing, or maintaining long-term assets.
Typical capital expenditures:
- Include purchasing long-term assets such as plants, equipment, buildings, machinery, furniture, and fixtures,
- Cover costs for intangible assets like licenses, trademarks, or patents,
- Significantly impact a firm's financial status both in the short and long term,
- Help companies sustain or enhance their daily operations.
CapEx is recorded on the balance sheet as an investment rather than an expense on the income statement.
Industry Dependence: The amount of CapEx a company incurs depends on its industry. Capital-intensive sectors, such as oil exploration, telecommunications, manufacturing, and utilities, tend to have higher CapEx levels.
Financial Statements: CapEx appears in the cash flow from investing activities section of the cash flow statement. Companies may refer to it as capital spending, purchases of property, plant, and equipment, or acquisition expenses.
How to Identify CapEx?
To identify CapEx, refer to the income statement and balance sheet:
- Find the current period's depreciation expense on the income statement.
- Locate the property, plant, and equipment balance for the current period on the balance sheet.
Types of Capital Expenditures (CapEx)
Various assets can provide long-term value to a company, and several types of purchases may be considered CapEx:
- Buildings: Used for office space, manufacturing, inventory storage, and more.
- Land: Can be developed or held as a speculative long-term investment, with different accounting treatments.
- Equipment and Machinery: Employed in manufacturing goods and converting raw materials into final products.
- Computers and Servers: Support company operations, logistics, reporting, and communication. Software can also be treated as CapEx in certain cases.
- Furniture: Furnishes office buildings, making them functional for employees, clients, and customers.
- Vehicles: Used for transporting goods, picking up clients, or business travel by staff.
- Patents: Hold long-term value if the ownership of an idea leads to successful product development.
How is Capital Expenditure Different from Revenue Expenditure?
| Aspect | Capital Expenditure | Revenue Expenditure |
| Nature | Long-term investment | Short-term, recurring expense |
| Purpose | Creates assets or improves long-term assets | Does not create assets or reduce liabilities |
| Examples | Purchase of machinery, buildings, land, equipment | Salaries, interest payments, subsidies, pensions |
| Accounting Treatment | Capitalized and depreciated over time | Expensed in the period incurred |
| Impact | Increases future earning potential and productivity | Covers day-to-day operational costs |
| Frequency | Occasional or periodic | Regular and recurring |
How to Calculate Net Capital Expenditure
Net Capital Expenditure (Net CapEx) can be determined using either a direct or indirect method. The direct method involves summing up all individual expenditures, while the indirect method infers the value by examining asset values and depreciation.
Direct Method
- Sum of amounts spent on individual assets
- Subtract the value received from sold assets
- The result is Net CapEx
Indirect Method
- Current period PP&E balance
- Subtract the previous period's PP&E balance
- Add the current period's depreciation
- The result is Net CapEx
Challenges with Capital Expenditures
Capital expenditure decisions are crucial but come with several complexities:
Measurement Problems
Accurately identifying, measuring, and estimating capital expenditure costs can be complex and challenging.
Unpredictability
Large investments in capital assets are aimed at generating predictable outcomes, but these outcomes are not guaranteed. The associated costs and benefits often involve significant uncertainty, and even the best forecasts can be incorrect. During financial planning, organizations must account for risks to mitigate potential losses, even though they cannot be completely eliminated.
Negative Capex vs. Positive Capex: Understanding the Differences
| Aspect | Negative Capex | Positive Capex |
| Definition | Indicates cash outflow for capital expenditures | Indicates cash inflow from the sale of capital assets |
| Implication | Company is investing in new long-term assets | Company is selling existing assets |
| Focus | Emphasizes on improving future operations and growth | May suggest insufficient investment in maintaining operations |
| Cash Flow Statement | Shown as a negative figure (cash outflow) | Shown as a positive figure (cash inflow) |
| Company Strategy | Indicates proactive investment in future capabilities | Could indicate divestment or a focus on short-term liquidity |
FAQs
What does CapEx mean?
Capital expenditures (CapEx) refer to the funds a company uses to acquire, upgrade, or renovate physical assets such as offices, buildings, technology, and equipment.
What is the capital expenditure formula?
The formula for calculating capital expenditure is:
CapEx = Net Increase in Property, Plant & Equipment (PP&E) + Depreciation Expense
What is capital expenditure with an example?
Capital expenditures are investments in assets that have a useful life of more than one year. Examples include land, buildings, furniture, computers, and software.
What is the difference between capital and revenue expenditure?
Capital expenditures are large, one-time purchases of fixed assets intended for long-term use. In contrast, revenue expenditures are the ongoing costs required to run daily business operations.
What is the difference between CapEx and OpEx?
Operating expenses (OpEx) are recurring costs necessary for day-to-day business activities, such as wages, rent, and utility bills. Capital expenditures (CapEx), on the other hand, are infrequent, substantial investments in long-term assets like office buildings, computers, and software.