What is CapEx (Capital Expenditure)?
Why companies use CapEx (and where to find it)
The types of expenditures CapEx encompasses should serve a company for the long haul, usually longer than 1 tax year. That’s why some people like to think of CapEx as funding for new projects and investments.
For example, if a company acquires a new manufacturing plant, the funds spent will be categorized under CapEx. The same applies to money spent on delivery trucks, business premises, and real estate assets.
The types of capital expenditures companies have vary across different industries. While some companies use their CapEx to increase the usage life of existing fixed assets, others use it to update equipment, upscale business activities, or expand their market footprint.
You’ll find all of these details indicated on the companies’ balance sheets — usually under the equipment, plant, and property sections.
What assets do companies spend CapEx on?
Assets that companies typically spend CapEx on include:
- Building renovations
- Storage facilities
Differences between CapEx and OpEx
While capital expenditure represents a company’s spending on fixed assets that are intended for long-term use, operating expenses (OpEx) indicate the day-to-day costs a company incurs to maintain its business operations.
In other words, you could say that CapEx focuses on gaining long-term benefits, while OpEx deals with short-term business expenses.
For example, if a company leased a piece of machinery instead of purchasing it, the funds would be listed under its operating expenses. If it purchased the piece of machinery instead, it would be listed under its capital expenditures.
Keep in mind that tax laws apply differently across the 2 types of expenditures. For example, unlike CapEx, OpEx is fully tax-deductible in the fiscal year in which the costs were incurred.
How to calculate CapEx
A company’s capital expenditures are usually listed in its cash flow statement. Specifically, CapEx should be located in the investing cash flow section, under acquisition expenses, capital spending, or property, plant, and equipment (PP&E).
It’s also possible to work out a company’s CapEx without referring to its cash flow statement. You will first need to find:
- The depreciation and amortization expenses from the company’s income statement
- The current period’s PP&E costs from the company’s balance sheet
- The previous period’s PP&E expenses from the same balance sheet
Using these figures, you can use the following CapEx formula to calculate the company’s capital expenditure:
CapEx = (current period’s PP&E - previous period’s PP&E) + current period’s depreciation
You can work out the PP&E balance by first subtracting the previous period’s PP&E from the current PP&E, and then adding that to the company’s current period depreciation expense. The resulting amount is the company’s total capital expenditure.
What CapEx tells you about a company
As a prospective investor, you can refer to a company’s CapEx to get an idea of how much it’s investing in new and existing fixed assets for the sake of business growth. Keep in mind that while the costs may seem high in the short term, the acquisitions should be capitalized gradually over the long haul.
That’s why companies commonly list their CapEx on the balance sheet as investments, rather than on the income statement along with other business expenses.
In your assessment, you may also wish to factor in the type of industry that a company falls into. Industries like manufacturing, telecommunications, and oil exploration tend to attract the highest levels of capital expenditures year in, year out.
CapEx has a number of important applications to the business world. The CapEx figure can help to inform your current and future investments, whether you obtain it from the cash flow statement or calculate it yourself.