What Is CAPEX?
Capital expenditures are sizable purchases of physical or tangible assets, which will be used for more than one year. In other words, CAPEX might consist of purchases of fixed assets designed to improve earnings for the company in the long term. CAPEX can also include upgrades to existing assets like machinery, for example.
Other examples of CAPEX include property, plant, and equipment, buildings, computers and company vehicles. As such, CAPEX items tend to be considerable costs that are spread over several years. CAPEX can also include intangible assets or non-physical assets, such as patents and licenses. Also, there are instances where research and development can be considered CAPEX.
Different industries require different levels of capital investment. For example, manufacturing companies tend to be capital-intensive, meaning they have a substantial amount of heavy equipment or fixed assets. As a result, both the initial purchase of the equipment and upgrades to existing equipment would be classified as a capital expenditure.
What Is Net Working Capital?
Current assets include cash, cash equivalents, accounts receivable and inventory. Current liabilities are financial obligations that are due in under one year – at the most; many are typically due in 90 days or less. Current liabilities include accounts payable, income taxes, dividends, short-term leases and debt that matures within one year. Both current assets and current liabilities are listed on the balance sheet.
Net working capital is a liquidity or solvency ratio since it shows how much money a company should have on hand over the next 12 months. Companies with poor net working capital numbers might find it difficult to obtain financing from creditors, investors and banks.
The Bottom Line
Net working capital is different from CAPEX since it measures the short-term liquidity of a company. CAPEX, on the other hand, is a long-term investment in the future of a company. Net working capital is related to CAPEX, albeit indirectly, however. For example, a company that generates positive net working capital on a consistent basis should have the financial viability to either make capital expenditures or obtain financing for capital expenditures.
For more on this topic, please read "How Are CAPEX and OPEX Different?"