Capital expenditures are major purchases, such as facilities and equipment, that companies make to maintain or expand their operations. Because such purchases involve acquiring assets that provide value and usefulness for a period of several years, companies recover the cost of these acquisitions gradually by depreciating the assets over time.
Ordinarily, businesses are not allowed to deduct the full costs of capital expenditures in the year the costs are incurred. Therefore, the substantial outlays of capital required for such purchases must be carefully planned out, usually years in advance, so companies can avoid overextending themselves financially and creating cash flow problems. For capital-intensive companies, good management of capital expenditures is crucial for survival and growth, as it requires striking a proper balance between their needs for the resources required to operate and expand their business and their ability to generate profits or obtain financing.
The companies that consistently have the largest capital expenditures are naturally those with operations that ongoing investments in expensive items, such as land, facilities, infrastructure and major manufacturing equipment. Energy companies and telecommunications firms traditionally top the list.
Energy companies can be subdivided into oil, gas and coal producers – the companies that explore, retrieve and refine energy sources – and power companies that deliver energy to businesses and individuals. Both sectors of the energy industry must regularly make substantial capital investments – oil and gas producers in the equipment required for retrieving and refining natural resources, and power companies in the massive infrastructure necessary to deliver energy. Like power companies, telecommunications companies require ongoing investments in infrastructure in addition to research and development and product manufacturing.
Another industry sector that has consistently high capital expenditures is transportation, which includes airlines, railroads and auto manufacturers. Airlines must regularly replace their fleets of aircraft, and auto manufacturers invest massive amounts of capital in research and development in addition to equipment required to manufacture their vehicles.
Other capital-intensive industries include computer manufacturers, healthcare, construction and hospitality.