The effects of capital expenditures, or CAPEX, on a company's valuation depend largely upon the category of CAPEX the company is spending. CAPEX can be used for either a company's maintenance or growth and productivity purposes. A company that uses most of its annual CAPEX to maintain production and profitability with higher annual maintenance costs typically has a lower valuation than a company that does not have such high annual maintenance costs.
A company with lower annual maintenance costs can use its CAPEX toward increasing revenue and productivity. No matter the use, annual CAPEX is still reported as expenditures on the income statement and calculated as a percentage of annual revenue that may potentially reduce profit for the fiscal year and negatively affect the company's valuation. Companies with more CAPEX spent for productivity may see more of an increase in revenue as a result of purchases that produce an increase in valuation.
An Example of the Effects of CAPEX
For example, a print shop requires necessary annual maintenance on its machines, which allows the shop to maintain production but not increase revenue or profit. The maintenance qualifies as CAPEX but is reported as an expenditure on the income statement, reducing the fiscal year's profit and ultimately, its valuation. Adversely, a retail clothing store requires very little annual maintenance, with the majority of its CAPEX being spent on productivity and growth purposes. While its CAPEX is also reported as an expenditure on the income statement, the expense results in an increase of revenue and profits, thus increasing the company's valuation.