Capital Expenditure (CapEx) Definition, Formula, and Examples

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 to increase the scope of their operations or add some future economic benefit to the operation.

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. Put differently, CapEx is 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 the company to 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 the industry. Some of the most capital-intensive industries have the highest levels of capital expenditures, including 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. Different companies highlight CapEx in several ways, and 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. On the income statement, find the amount of depreciation expense recorded for the current period. On the balance sheet, locate the current period's property, plant, and equipment line-item balance.

Locate the company's prior-period PP&E balance and 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 current-period depreciation expense to arrive at the company's current-period CapEx spending.

Types of CapEx

Many different types of assets can attribute long-term value to a company. Therefore, several types of purchases may be considered CapEx.

• Buildings may be used for office space, manufacturing of goods, storage of inventory, or other purposes.
• Land may be used for further development. Accounting treatment may be different for land specifically held as a speculative long-term investment.
• Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale.
• Computers or servers may be used to support a company's operational aspects, including the logistics, reporting, and communication of operations. Software may also be treated as CapEx in certain circumstances.
• Furniture may be used to furnish an office building to make the space usable by staff and customers.
• Vehicles may be used to transport goods, pick up clients, or used by staff for business purposes.
• Patents may hold long-term value should the right to own an idea come to fruition through product development.
  

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+Current Depreciationwhere:CapEx=Capital expendituresΔPP&E=Change in property, plant, and equipment​

Capital expenditures are also used in calculating free cash flow to equity (FCFE). FCFE 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=Free cash flow to equityEP=Earnings per shareCE=CapExD=DepreciationDR=Debt ratioΔC=ΔNet capital, change in net working capital​

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=Net incomeNCE=Net CapExND=New debtDR=Debt repayment​

Special Considerations

Aside from analyzing a company's investment in its fixed assets, the CapEx metric is used in several ratios for company analysis. 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-CapEx ratio 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 needed to fund its asset acquisitions. On the other hand, a ratio of less than 1.0 may indicate that the company is having issues with cash inflows and, hence, its purchase of capital assets. A company with a ratio of less than one may need to borrow money to fund its purchase of capital assets.

CapEx vs. Operating Expenses (OpEx)

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

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

Examples of CapEx

As part of its 2023 fiscal year-end financial statements, Apple, Inc. reported total assets of $352.6 billion. Of this amount, it recorded $43.7 billion of property, plant, and equipment, net of accumulated depreciation.

These balances are dictated by Generally Accepted Accounting Principles (GAAP). The rules, treatment, and policies a company must follow when accounting for CapEx usually mirror Apple's treatment below.

Apple's balance sheet aggregates all property, plant, and equipment into a single line. However, more information on property, plant, and equipment is often required to be reported within the notes to the financial statements. In this case, this supplementary information explains that Apple has a gross PPE of $114.6 billion, with $78.3 billion made up of machinery, equipment, and internal-use software.

The property, plant, and equipment balance is reduced by its accumulated depreciation balance. In this example, Apple has utilized $70.9 billion of the $114.6 billion of CapEx. The book value of this category of CapEx is valued at $43.7 billion.

Example of How to Use CapEx

Here's a hypothetical example to show how CapEx works. 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=CapExCash Flow from Operations​where:CF/CapEx=Cash flow to capital expenditure ratio​

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

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

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

$\begin{aligned} &\frac { \$6.88\ \text{Billion} }{ \$1.25\ \text{Billion} } = 5.49 \\ \end{aligned}$​$1.25 Billion$6.88 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 with similar CapEx requirements.

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.