Loading the player...

What is 'Capital Expenditure (CAPEX)'

Capital expenditure, or CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. CapEx is often used to undertake new projects or investments by the firm. This type of financial outlay is also made by companies to maintain or increase the scope of their operations.

Capital expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.

BREAKING DOWN 'Capital Expenditure (CAPEX)'

In terms of accounting, an expense is considered to be a capital expenditure when the asset is a newly purchased capital asset or an investment that improves the useful life of an existing capital asset. If an expense is a capital expenditure, it needs to be capitalized. This requires the company to spread the cost of the expenditure (the fixed cost) over the useful life of the asset. If, however, the expense is one that maintains the asset at its current condition, the cost is deducted fully in the year the expense is incurred.

[ Capital expenditures can have a significant impact on shareholder value, especially for companies that need expensive equipment for their operations. Investopedia's Fundamental Analysis Course provides a comprehensive introduction to fundamental analysis with over five hours of on-demand video, exercises, and interactive content. You'll learn how to read financial statements, interpret financial ratios, and much more. ]

CapEx can be found in the cash flow from investing activities in a company's cash flow statement. Different companies highlight CapEx in a number of ways, and an analyst or investor may see it listed as capital spending, purchases of property, plant, and equipment (PPE), acquisition expense, etc. The amount of capital expenditures a company is likely to have depends on the industry it occupies. Some of the most capital intensive industries have the highest levels of capital expenditures including oil exploration and production, telecommunication, manufacturing, and utility industries. For example, Ford Motor Company, for the fiscal year ended 2016, had $7.46 billion in capital expenditures, compared to Medtronic which purchased PPE worth $1.25 billion for the same fiscal year.

Capital expenditure should not be confused with revenue expenditure or operating expenses (OPEX). Revenue expenses are shorter-term expenses required to meet the ongoing operational costs of running a business, and therefore they are essentially identical to operating expenses. Unlike capital expenditures, revenue expenses can be fully tax-deducted in the same year in which the expenses occur.

Using Capital Expenditures in Multiples for Relative Valuation

The cash flow to capital expenditure ratio, or CF/CapEX ratio, relates to a company's ability to acquire long term assets using free cash flow. The cash flow to capital expenditures ratio will often fluctuate as businesses go through cycles of large and small capital expenditures. A ratio greater than 1 could mean that the company's operations are generating the cash needed to fund its asset acquisitions. On the other hand, a low ratio may indicate that the company is having issues with cash inflows and, hence, its purchase of capital assets. A company with a ratio less than one may need to borrow money to fund its purchase of capital assets. 

CF to CapEx is calculated as:

CF/CapEx = Cash Flow From Operations / Capital Expenditures

Using this formula, Ford Motor Company's CF/CapEx = $14.51 billion/ $7.46 billion = 1.94. Medtronic's CF/CapEx = $6.88 billion/$1.25 billion = 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 that has similar CapEx requirements.

Capital expenditure can also be used in calculating free cash flow to equity (FCFE) to a firm with the following formula: 

FCFE = Earnings Per Share – (CapEx – Depreciation)(1 – Debt Ratio) -  (Change in Net Working Capital)(1 – Debt Ratio)

or alternatively: 

FCFE = Net Income - Net CapEx - Change in Net Working Capital + New Debt - Debt Repayment

The greater the capital expenditure for a firm, the lower the free cash flow to equity.

  1. Cash Flow To Capital Expenditures ...

    A ratio that measures a company's ability to acquire long term ...
  2. Cash Flow From Investing Activities

    An item on the cash flow statement that reports the aggregate ...
  3. Capital Investment

    Capital investment refers to funds invested in a firm or enterprise ...
  4. Residual Dividend

    The term residual dividend refers to a method of calculating ...
  5. Autonomous Expenditure

    A macroeconomic term used to describe the components of an economy's ...
  6. Capitalization Ratios

    Capitalization ratios are indicators that measure the proportion ...
Related Articles
  1. Small Business

    Capital Expenditure Versus Revenue Expenditure

    Capital expenditures and revenue expenses have significant differences. Here's the difference between the two.
  2. Investing

    Cash Flow Statement: Analyzing Cash Flow From Investing Activities

    An overview of cash flow from investing activities, one of three primary categories in the statement of cash flows.
  3. Investing

    Capex Report: Telecom Leads in Spending (T,VZ)

    Find out why the telecom sector led in 2015 spending on capital expenditures and understand how operating cash flow and total cash holdings have enabled that.
  4. Investing

    Amazon Foots Major Capex Bill, Investors Don’t Seem to Mind

    Capital expenditures at the global ecommerce giant were up sharply in 2016, but so were its shares.
  5. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  6. Investing

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
  7. Investing

    Free Cash Flow: Free, But Not Always Easy

    Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery.
  8. Investing

    Key Financial Ratios for Pharmaceutical Companies

    Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.
  9. Investing

    Why Goldman Is Warning About Free Cash Flow Yield (GS)

    Learn why Goldman Sachs is alerting investors to the importance of cash flow, and discover a recommended alternative equity valuation metric to free cash flow.
  1. What is the difference between a capital expenditure and a revenue expenditure?

    Capital expenditures represent major investments of capital that a company makes to expand its business and generate additional ... Read Answer >>
  2. What is the difference between CAPEX and OPEX?

    Discover the differences between a company's capital expenditures and operational expenses, and find out how tax laws apply ... Read Answer >>
  3. Why do companies often treat events such as the purchase of an asset or construction ...

    Understand the capitalized costs of fixed assets and learn how they are reflected on a company's balance sheet and income ... Read Answer >>
  4. Why is it that under some circumstances, capital expenditure cannot be tax-deducted ...

    Understand the meaning of capital expenditures, and learn what the implications are for companies resulting from tax laws ... Read Answer >>
  5. Is it wise for a company to have heavy cash flow investing activities outside of ...

    Learn if it's wise for a company to have heavy cash flow from investing activities outside of its capital expenditures. Understand ... Read Answer >>
  6. Besides free cash flow to equity (FCFE), what are other metrics for estimating a ...

    Learn about metrics used to calculate a company's value, including capital expenditure, revenue expenditure, price-to-earnings ... Read Answer >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center