CapEx Explained

CapEx

CapEx – what is it?

CapEx (Capital Expenditures) is the money company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.

Capital expenditures can include:

  • Plant and equipment purchases
  • Building expansion and improvements
  • Hardware purchases, such as computers
  • Vehicles to transport goods

Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment. Moreover, the company does not capitalize on its income statement as an expenditure.

How to calculate the CapEx?

If you have access to a company’s cash flow statement, you do not need any calculation. Look for the company’s capital expenditures in the Cash Flows From Investing section of the company’s cash flow statement.

You can also calculate capital expenditures by 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 (PP&E) 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.

CapEx formula: CapEx = PP&E (Current Year) – PP&E (Last Year) + Depreciation (Current Year)

PP&E (property, plant, and equipment) in the formula is a fixed, tangible asset. It is a fixed asset because PP&E cannot easily be sold or turned into cash and is expected to add value to a business for over a long period of time.

CapEx vs. OpEx

We should not confuse capital expenditure (CapEx) with operating expenses (OpEx). Operating expenses are shorter-term expenses that meet the ongoing operational costs of running a business. Unlike capital expenditures, we can fully deduct the operating expenses on the company’s taxes in the same year in which the expenses occur.

How to use capital expenditures?

Once you’ve calculated your company’s capital expenditures, you can use this total to help with your financial planning. These will also allow you to see how much money your company invests in new or existing fixed assets.

In addition, it can help guide your decisions based on how much you’ve spent on fixed assets in previous periods. Ideally, you want to invest in assets that will make the highest profit for your business.

Besides, it is wise to choose assets that will have a long life span. Calculating your capital expenditures can help you gain insight into your future investments. The hope is to avoid any financial losses. The company’s financial decisions can either hurt or help to make a profit. Learn to make wise decisions and calculate your CapEx thoroughly and accurately.

Conclusion

  • Capital expenditure is a payment for goods or services recorded, or capitalized, on the balance sheet instead of expensed on the income statement.
  • CapEx spending is important for companies to maintain existing property, plant & equipment, and invest in new technology and other assets for growth.
  • If an item has a useful life of less than one year, it must be expensed on the income statement rather than capitalized.

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