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 in an effort to increase the scope of their operations or to 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. It's 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 that the company 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 its industry. Some of the most capital-intensive industries have the highest levels of capital expenditures. They include 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. Companies can highlight CapEx in various ways. 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. Find the amount of depreciation expense recorded for the current period on the income statement. Locate the current period's property, plant, and equipment line-item balance on the balance sheet.

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

Types of CapEx

Many types of assets can attribute long-term value to a company. 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 can vary for land that's 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 can be used to furnish an office building, making the space usable by staff, clients, and customers.
• Vehicles may be used to transport goods and pick up clients or by staff for business purposes.
• Patents can hold long-term value if the right to own an idea comes 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). This 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

The CapEx metric is used in several ratios for company analysis in addition to analyzing its investment in its fixed assets. 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 necessary to fund its asset acquisitions. A ratio of less than 1.0 may indicate that the company is having issues with cash inflows and its purchase of capital assets. A company with a ratio of less than one may have to borrow money to fund its purchase of capital assets.

CapEx vs. Operating Expenses (OpEx)

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

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

Examples of CapEx

Apple, Inc. (AAPL) reported total assets of $352.6 billion as part of its 2023 fiscal year-end financial statements. It recorded $43.7 billion of property, plant, and equipment of this amount, 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.

Apple's balance sheet aggregates all property, plant, and equipment into a single line but more information on property, plant, and equipment is often required to be reported within the notes to the financial statements. 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. Apple has utilized $70.9 billion of the $114.6 billion of CapEx in this example. The book value of this category of CapEx is valued at $43.7 billion.

Example of How to Use CapEx

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​

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

$\begin{aligned} &\frac { \$14.51\ \text{Billion} }{ \$7.46\ \text{Billion} } = 1.94 \\ \end{aligned}$​$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. CapEx can tell you how much a company invests in existing and new fixed assets to maintain or grow its business.