Capital expenditure

Before you rely on it

What to check

For property, confirm a reserve is being set aside for roofs, systems and appliances.

The common error

Where people go wrong with capital expenditure

Reading a pro forma with no capital reserve line as a better deal. It is not a better deal, it is an incomplete one, and the missing line is usually the largest single expense of the holding period.

Worked through

Capital expenditure in plain numbers

A delivery business buys a van for $45,000; the spending gives the company an asset that will serve for years, so it is capitalized and depreciated, say over five years at $9,000 a year. That $9,000 appears as an expense each year. A $600 repair a few months later is different: it keeps the van running and is expensed at once. If the company adds a $6,000 refrigeration unit that extends the van's usefulness, that is capital again; the line between the two decides how much profit is reported in each year, though the cash leaves on the same day.

Easily confused

Capital expenditure and its neighbours

Capital expenditure is often paired with operating expenditure, and the difference is about benefit over time. Capex buys assets that last beyond the current period. Opex covers day-to-day costs such as wages, rent and repairs. Capex is also not the same as depreciation, which is the gradual expense recognized after the purchase. Maintenance capex keeps existing capacity going, while growth capex adds capacity, and analysts look at both, since a business can appear healthy by underinvesting in maintenance for a few years.

In real decisions

Where capital expenditure turns up

Capex shows up in the cash flow statement under investing activities; managers plan it in budgets and weigh returns with payback or IRR analysis; investors subtract it from operating cash flow to see free cash flow. Capital-intensive industries such as utilities, telecoms and manufacturing spend a large share of revenue on it. Tax rules often allow accelerated deductions for some capex, so timing purchases can change the tax bill. Lenders check that capex plans are affordable before extending credit.

Know the edges

Where capital expenditure stops being reliable

Classification involves judgment, and companies apply different thresholds and policies; the same spending may be capital in one company and an expense in another, which makes comparisons tricky. Capex figures also fluctuate: a big project makes one year look unusual. Divide by revenue or compare with depreciation to see patterns. Remember too that a capital purchase is not automatically a good investment. Its return depends on whether the asset generates more value than it costs over its life.

Quick answers

What people ask about capital expenditure

What is the difference between capex and opex? Capex buys assets that last beyond the year and is depreciated. Opex covers routine running costs and is expensed at once. The line depends on the accounting policy and the useful life of the item.

Why do investors watch capex? It shows how much a company reinvests to maintain and grow. Falling capex can lift free cash flow for a while and hide underinvestment. Compare it with depreciation and revenue.