Capital expenditures

Capital Expenditures or CapEx refers to the funds used by a company to acquire, upgrade, and maintain physical assets. This could include property, buildings, an industrial plant, technology, 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 increase the scope of their operations.

Overview

Capital expenditures can be found in the cash flow from investing activities in a company's cash flow statement. These expenditures are, however, not accounted for in the income statement initially. Instead, they are treated as an asset on the balance sheet that gets depreciated over the life of the asset. The depreciation appears on the income statement during the life of the asset.

Types of Capital Expenditures

Capital expenditures can be categorized into two types: Maintenance CapEx (also known as replacement CapEx) and Growth CapEx.

• Maintenance CapEx involves expenditures that are necessary to maintain the company's current operations. This includes replacing worn-out or non-functioning equipment, repairing existing equipment, and restoring already existing company assets.

• Growth CapEx is the capital expenditure incurred when a company invests for growth. This includes the cost of acquiring new equipment, buildings, or subsidiaries, or investing in new technology to increase the company's production capacity.

Importance of Capital Expenditures

Capital expenditures are crucial for companies to grow and maintain their business operations. They are also a key indicator of a company's future earnings potential. A company that consistently makes more capital expenditures is likely investing in its future growth.

Calculation

The formula for calculating capital expenditures is:

CapEx = ΔPP&E + Current Depreciation

Where:

• ΔPP&E is the net change in property, plant, and equipment
• Current Depreciation is the current year's depreciation expense

See Also

• Cash flow statement
• Income statement
• Balance sheet
• Depreciation
• Financial statement