What is a Capital Expenditure?

March 12, 20236 min read
What is a Capital Expenditure?
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Key Takeaways

  • Any payment made, or debt assumed, to acquire, upgrade, or maintain long-term assets essential to the operation of a business is referred to as a capital expenditure (CapEx).
  • A key difference between a CapEx and an operating expenditure (OpEx) is the amount of time the benefit of the expense is expected to last.
  • Given the ability of capital expenditures to contribute to a company’s growth potential, investors can use CapEx as a measure of a company’s management team’s growth expectations.

Any payment made to acquire, upgrade, or maintain long-term assets essential to the operation of a business is referred to as a capital expenditure (CapEx). The disbursement can be in the form of cash or debt taken on to invest in assets such as property, plants, buildings, technology, or equipment.

Such expenditures benefit the company beyond a single fiscal year and are essential to the functioning, as well as the growth of a business. These outlays are recorded on the balance sheet of a company, as opposed to appearing as an expense on its income statement.

Given the ability of capital expenditures to contribute to a company’s growth potential, investors can use CapEx as a measure of a company’s management team’s growth expectations.

Capital Expenditure vs. Operating Expenditure

One difference between a CapEx and an operating expenditure (OpEx) is the amount of time the benefit of the expense is expected to last.

A CapEx is looked upon as a one-time outlay impacting a long-term asset, because the benefit of the investment is expected to last more than one year. As an example, the purchase of a building to house a new business division is considered a capital expense, because the benefit of that expenditure is anticipated to be ongoing.

Conversely, a payment made to acquire supplies such as printer ink, paper, staples or the like is referred to as an operating expenditure (OpEx). These sorts of items must typically be purchased frequently, so the benefit of such an outlay is expected to last less than one year. As a result, these costs appear on a company’s income statement, in the form of operating expenses.

Types of Capital Expenditures

A wide variety of asset acquisitions can generate long-term value for a company.

Among them are buildings, land, equipment, computers or servers, furniture, vehicles and patents, as well as licenses. Other types of investments considered CapEx include costs associated with upgrading an existing asset, renovating an obsolete or non-functioning asset, adapting an asset for a different use, or starting or buying a new business division.

Expenditures in each of these areas hold the potential to contribute to the long-term growth of the company. One exception however, is a cost incurred to maintain an asset in its current condition, such as a repair that keeps an asset in good working order, but does not change or improve the nature of its functioning.

This outlay would be recorded as an OpEx.

Calculating a Capital Expenditure

A CapEx can often be found on a company’s cash flow statement under the heading of investing activities.

A CapEx can also be calculated, based upon key pieces of data found on a company’s income statements and balance sheets. Balance sheets should list the firm’s current property, plant and equipment (PP&E) line item balance. Income statements should list the amount of depreciation expense the organization noted for the current period.

Determining the difference between a prior PP&E balance and the current one will reveal the change in the balance. Adding the change to the current-period’s depreciation listed on the income statement will give the current CapEx spending for the company.

The basic formula is:

CapEx = ΔPP&E + Current Depreciation

Where the variables are defined as:

CapEx = Capital expenditures
ΔPP&E = Change in value of property, plant, and equipment​

Capital Expenditure Example

Say a company has assets totaling $701 billion and PP&E totaling $158 billion—net of accumulated depreciation. Say also, the company’s balance sheet aggregates all PP&E into a single line.

Checking the supplementary information section of the balance sheet, it is revealed that the company’s gross PP&E is $218 billion, of which some $158 billion is comprised of facilities, equipment and patents. The notes also explain the PP&E balance is diminished by the balance of accumulated depreciation totaling $140.6 billion.

Thus, $140.6 billion of the $218 billion in CapEx is utilized.

This means the book value of its CapEx is roughly $77 billion.

The Value of CapEx to Investors

Calculating a company’s CapEx will tell investors how much the company invests in the growth of the business. Given the size of a typical capital expenditure, approval from the board of directors or shareholders is generally required before they are made.

This gives investors some insight into the way the company is being managed. Is the company growth oriented? What kind of future does its management team anticipate and what are they doing to help position the company to get there? As an example, upgrading fixed assets such as machinery or acquiring an office building can help accelerate the growth of the company and firm up its potential to operate effectively on a larger scale.

This company is likely poised for growth, which means it could hold the potential to be a positive addition to an investment portfolio. Or, in the case of a startup or a venture capital opportunity, capital expenditures of this nature could indicate the company is a good alternative investment with which to diversify a portfolio.

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Alternative Investments and Portfolio Diversification

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In Summary

A capital expenditure is a payment made or debt taken on to improve business operations. Such outlays are recorded on a company’s balance sheet. Examples include the acquisition of land, vehicles, buildings, or heavy machinery.

Capital expenditures are usually made to initiate new projects or enhance the company’s ability to operate at scale. With this in mind, evaluating a company’s CapEx can provide investors with some insight to a management team’s long-term expectations.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments. It should be understood that these risks are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices and carry additional risk of loss. This includes the possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments. Further, these investments are generally considered to be illiquid, due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.