What Is Capital Expenditure (CapEx)?
A company’s capital expenditure refers to cash that is used to buy, update, and maintain tangible assets. These assets may include land, plants, buildings, technology, or equipment.
CapEx is frequently utilized by businesses to fund new projects or expenditures. Repairing a roof, acquiring equipment, or establishing a new factory are all examples of capital expenditures on fixed assets. Companies use this form of financial investment to expand their activities’ scope or add some economic advantage to the activity.
CapEx measures how much a firm spends on current and new fixed assets to sustain or expand its operations. To put it another way, CapEx is any form of the expenditure that a firm capitalizes or reports as an investment on its balance sheet rather than as an expense on its income statement. When a corporation capitalizes an asset, the cost of the investment is spread out throughout the asset’s useful life.
The amount of capital expenditures a firm will likely incur is determined by its industry. Oil exploration and production, telecommunications, manufacturing, and utility industries are among the most capital-intensive businesses with the most outstanding capital expenditures.
CapEx may be noted in a company’s cash flow statement under cash flow from investment activities. CapEx is referred to in various ways by different firms. It may be referred to as capital spending, acquisitions of property, plant, and equipment (PP&E), or acquisition expense by an analyst or investor.
The CapEx measure is utilized in numerous ratios for company analysis and measuring a firm’s investment in fixed assets. The cash-flow-to-capital-expenditures (CF-to-CapEx) ratio measures a company’s capacity to invest in long-term assets using free cash flow. As organizations go through cycles of significant and minor capital expenditures, the CF-to-CapEx ratio will change. A higher ratio indicates that the company’s activities are producing enough cash to finance asset acquisitions. On the other hand, a low ratio suggests that the firm is experiencing problems with cash inflows and, as a result, its capital asset purchases.
Capital Expenditure Example
Suppose a company uses cash of about $2,000 to buy, update, and maintain tangible assets such as land, plants, buildings, technology, or equipment. In that case, it is appropriate to refer to cash used as Capital Expenditure.« Back to Glossary Index