Capital Expenditure (CapEx) Definition, Formula, and Examples (2024)

What Are Capital Expenditures (CapEx)?

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof if the useful life of the roof is extended, purchasing a piece of equipment, or building a new factory.

This type of financial outlay is made by companies in an effort to increase the scope of their operations or to add some future economic benefit to the operation.

Key Takeaways

Capital expenditures are payments that are made for goods or services that are recorded or capitalized on a company's balance sheet rather than expensed on the income statement.
Spending is important for companies to maintain existing property and equipment and to invest in new technology and other assets for growth.
An item must be expensed on the income statement rather than capitalized if it has a useful life of less than one year so it isn't considered CapEx.
Operating expenses (OpEx) are shorter-term expenses used for the day-to-day operations of a business, unlike CapEx.
Examples of CapEx include the purchase of land, vehicles, buildings, or heavy machinery.

Capital Expenditure (CapEx) Definition, Formula, and Examples (1)

Understanding Capital Expenditures (CapEx)

CapEx can tell you how much a company invests in existing and new fixed assets to maintain or grow its business. It's any type of expense that a company capitalizes or shows on its balance sheet as an investment rather than on its income statement as an expenditure. Capitalizing an asset requires that the company spread the cost of the expenditure over the useful life of the asset.

The amount of capital expenditures a company is likely to have depends on its industry. Some of the most capital-intensive industries have the highest levels of capital expenditures. They include oil exploration and production, telecommunications, manufacturing, and utility industries.

CapEx can be found in the cash flow from investing activities in a company's cash flow statement. Companies can highlight CapEx in various ways. You may see it listed as capital spending, purchases of property, plant, and equipment (PP&E), or acquisition expenses.

You can also calculate capital expenditures using data from a company's income statement and balance sheet. Find the amount of depreciation expense recorded for the current period on the income statement. Locate the current period's property, plant, and equipment line-item balance on the balance sheet.

Find the company's PP&E balance from the prior period. Take the difference between the two to find the change in the company's PP&E balance. Add the change in PP&E to the depreciation expense for the current period to arrive at the company's current-period CapEx spending.

Types of CapEx

Many types of assets can attribute long-term value to a company. Several types of purchases may be considered CapEx.

Formula and Calculation of CapEx

$\begin{aligned} &\text{CapEx} = \Delta \text{PP\&E} + \text{Current Depreciation} \\ &\textbf{where:}\\ &\text{CapEx} = \text{Capital expenditures} \\ &\Delta \text{PP\&E} = \text{Change in property, plant, and equipment} \\ \end{aligned}$ CapEx=ΔPP&E+CurrentDepreciationwhere:CapEx=CapitalexpendituresΔPP&E=Changeinproperty,plant,andequipment

Capital expenditures are also used in calculating free cash flow to equity (FCFE). This is the amount of cash available to equity shareholders. The formula for FCFE is:

$\begin{aligned} &\text{FCFE} = \text{EP} - ( \text{CE} - \text{D} ) \times ( 1 - \text{DR} ) - \Delta \text{C} \times ( 1 - \text{DR} ) \\ &\textbf{where:}\\ &\text{FCFE} = \text{Free cash flow to equity} \\ &\text{EP} = \text{Earnings per share} \\ &\text{CE} = \text{CapEx} \\ &\text{D} = \text{Depreciation} \\ &\text{DR} = \text{Debt ratio} \\ &\Delta \text{C} = \Delta \text{Net capital, change in net working capital} \\ \end{aligned}$ FCFE=EP−(CE−D)×(1−DR)−ΔC×(1−DR)where:FCFE=FreecashflowtoequityEP=EarningspershareCE=CapExD=DepreciationDR=DebtratioΔC=ΔNetcapital,changeinnetworkingcapital

Alternatively, it can be calculated as:

$\begin{aligned} &\text{FCFE} = \text{NI} - \text{NCE} - \Delta \text{C} + \text{ND} - \text{DR} \\ &\textbf{where:}\\ &\text{NI} = \text{Net income} \\ &\text{NCE} = \text{Net CapEx} \\ &\text{ND} = \text{New debt} \\ &\text{DR} = \text{Debt repayment} \\ \end{aligned}$ FCFE=NI−NCE−ΔC+ND−DRwhere:NI=NetincomeNCE=NetCapExND=NewdebtDR=Debtrepayment

The greater the CapEx is for a firm, the lower the FCFE.

Special Considerations

The CapEx metric is used in several ratios for company analysis in addition to analyzing its investment in its fixed assets. The cash-flow-to-capital-expenditures (CF-to-CapEx) ratio relates to a company's ability to acquire long-term assets using free cash flow. The CF-to-CapExratio will often fluctuate as businesses go through cycles of large and small capital expenditures.

A ratio greater than 1.0 could mean that the company's operations are generating the cash necessary to fund its asset acquisitions. A ratio of less than 1.0 may indicate that the company is having issues with cash inflows and its purchase of capital assets. A company with a ratio of less than one may have to borrow money to fund its purchase of capital assets.

CapExvs. Operating Expenses (OpEx)

Capital expenditure shouldn't be confused with operating expenses (OpEx).Operating expenses are shorter-term expenses that are required to meet the ongoing operational costs of running a business. Operating expenses can be fully deducted from the company's taxes in the same year in which the expenses occur, unlike capital expenditures.

An expense is considered to be CapEx when the asset is a newly purchased capital asset or an investment that has an expected life of more than one year or it improves the useful life of an existing capital asset. The cost is typically deducted fully in the year the expense is incurred, however, if the expense maintains the asset in its current condition, such as a repair.

Examples of CapEx

Apple, Inc. (AAPL) reported total assets of $352.6 billion as part of its 2023 fiscal year-end financial statements. It recorded $43.7 billion of property, plant, and equipment of this amount, net of accumulated depreciation.

Example of How to Use CapEx

Let's say ABC Company had $7.46 billion in capital expenditures for the fiscal year compared to XYZ Corporation which purchased PP&E worth $1.25 billion for the same fiscal year. The cash flow from operations for ABC Company and XYZ Corporation for the fiscal year was $14.51 billion and $6.88 billion respectively.

CF-to-CapEx is calculated as follows:

$\begin{aligned} &\text{CF/CapEx} = \frac { \text{Cash Flow from Operations} }{ \text{CapEx} } \\ &\textbf{where:}\\ &\text{CF/CapEx} = \text{Cash flow to capital expenditure ratio} \\ \end{aligned}$ CF/CapEx=CapExCashFlowfromOperationswhere:CF/CapEx=Cashflowtocapitalexpenditureratio

ABC's CF-to-CapEx is as follows using this formula:

$\begin{aligned} &\frac { \$14.51\ \text{Billion} }{ \$7.46\ \text{Billion} } = 1.94 \\ \end{aligned}$ $7.46Billion$14.51Billion=1.94

XYZ's CF-to-CapEx is as follows:

$\begin{aligned} &\frac { \$6.88\ \text{Billion} }{ \$1.25\ \text{Billion} } = 5.49 \\ \end{aligned}$ $1.25Billion$6.88Billion=5.49

It is important to note that this is an industry-specific ratio and should only be compared to a ratio derived from another company with similar CapEx requirements.

What Type of Investment Is CapEx?

CapEx is the investments that a company makes to grow or maintain its business operations. Capital expenditures are less predictable than operating expenses that recur consistently from year to year. A company that buys expensive new equipment would account for that investment as a capital expenditure. It would therefore depreciate the cost of the equipment throughout its useful life.

Is CapEx Tax Deductible?

Capital expenditures aren't directly tax-deductible but they can indirectly reduce a company’s taxes through the depreciation they generate. A company could include $100,000 of depreciation expense each year for 10years if it purchases a $1 million piece of equipment with a useful life of 10 years. This depreciation would reduce the company’s pre-tax income by $100,000 annually, reducing its income taxes.

What Is the Difference Between CapEx and OpEx?

The key difference between capital expenditures and operating expenses is that operating expenses recur on a regular and predictable basis such as rent, wages, and utility costs. Capital expenses occur much less frequently and with less regularity. Operating expenses are shown on the income statement and are fully tax-deductible. Capital expenditures only reduce taxes through the depreciation they generate.

What Is an Example of CapEx?

The purchase is often capitalized and treated as CapEx when a company acquires a vehicle to add to its fleet. The cost of the vehicle is depreciated over its useful life and the acquisition is initially recorded on the company's balance sheet.

This is treated differently than OpEx, such as the cost to fill up the vehicle's gas tank. The tank of gas has a much shorter useful life to the company so it's expensed immediately and treated as OpEx.

The Bottom Line

Capital expenditures are purchases made by a company and capitalized on a balance sheet rather than being fully expensed at the time of purchase. Assets that are capitalized can be accounted for over their useful lifetime and depreciated. CapEx can tell you how much a company invests in existing and new fixed assets to maintain or grow its business.