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Capital Expenditures (CapEx)

What Are Capital Expenditures?

Capital expenditures (CapEx) are long-term investments that a company makes to expand or improve its business. Investors and analysts generally view an increase in CapEx as a positive sign because it indicates that a company's business is growing. Similarly, rising CapEx for the entire economy is a positive macroeconomic indicator and generally a bullish signal for stocks.

Capital expenditures include such things as the addition or expansion of factories, office buildings, computer and software equipment, machinery, vehicles, land, and the like. For accounting purposes, these expenses are carried on the company's balance sheet as an asset and have a useful life of more than one year. Likewise, capital expenditures appear in the company's cash flow statement as an investing activity.

Companies do not account for capital expenditures as an expense immediately. Rather, they depreciate the asset over its expected useful life. For example, if the company builds a US$25 million factory that it expects to have a useful life of five years, it charges US$5 million, or one-fifth, as a depreciation expense on its current income statement.

How To Calculate CapEx

Besides looking at the investing activities section of the cash flow statement, you can also calculate a company's CapEx by finding its property, plant and equipment (PP&E) on its current balance sheet, subtracting the PP&E figure from the prior period, and adding in the depreciation from the company's current income statement.

The equation is: CapEx = PP&E (current period) – PP&E (prior period) + depreciation (current period)

Difference From Operating Expenses

CapEx differs from operating expenses, which cover regular maintenance and have a useful life of less than a year. For example, the purchase of a new truck or construction of a building would be a capital expenditure, but repairing the truck or the building would be an operating expense. Operating expenses are included in the company's income statement in the year they are incurred.

Not surprisingly, the most capital-intensive industries tend to have the highest levels of CapEx, such as manufacturers, utilities, oil exploration and production companies, and telecommunications providers.

Summary

Capital expenditures (CapEx) are the long-term (i.e., greater than one year) investments a company makes in order to increase its business. Investors generally view an increase in CapEx as a positive sign of growth. CapEx differs from operating expenses, which cover regular maintenance and repairs. For accounting purposes, CapEx is considered to be an asset on the company's balance sheet.

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