Capital Expenditure (CapEx): Definition, Formulas, and Examples

Capital expenditures (CapEx) are funds a company spends to acquire, upgrade, or maintain long-lived physical assets—buildings, equipment, vehicles, software, and similar items—that support operations and generate benefits over multiple years. CapEx is capitalized on the balance sheet and depreciated (or amortized) over the asset’s useful life, rather than being expensed immediately.

Key takeaways

• CapEx represents long-term investments in fixed assets and appears in the investing activities section of the cash flow statement and as PP&E on the balance sheet.
• Common formula: CapEx = Change in PP&E + Depreciation.
• Capital-intensive industries (manufacturing, utilities, telecommunications, oil & gas) typically have high CapEx needs.
• CapEx differs from operating expenses (OpEx): OpEx are short-term, fully deductible in the year incurred; CapEx reduces taxes gradually via depreciation.
• The cash flow–to–CapEx ratio helps assess whether operations generate enough cash to fund asset investment (ratio > 1 generally indicates sufficient cash flow).

What counts as CapEx?

Typical capital expenditures include:
* Buildings and facility construction or improvements
Land purchases for development
Machinery and manufacturing equipment
Computers, servers, and (in many cases) capitalized software
Vehicles for company fleets
Office furniture and fixtures
Patents and other long-lived intangible assets (when capitalized)

Expenses that only maintain an asset’s current condition (routine repairs) are usually expensed as OpEx, not capitalized.

Where to find CapEx and how to calculate it

CapEx is reported in the investing activities section of the cash flow statement and links to property, plant, and equipment (PP&E) on the balance sheet. Depreciation expense appears on the income statement.

A practical calculation:
CapEx = Change in PP&E + Depreciation

Step-by-step:
1. Find PP&E at the end of the current period and the prior period on the balance sheet.
2. Calculate the change: ΔPP&E = PP&E_current − PP&E_prior.
3. Add current-period depreciation expense (from the income statement).
4. The sum approximates CapEx for the period.

Ratios and analysis

Cash-flow-to-CapEx (CF/CapEx) ratio:
CF/CapEx = Cash flow from operations / CapEx

Interpretation:
* CF/CapEx > 1: operations generate enough cash to fund capital investment.
* CF/CapEx < 1: company may need to borrow, use cash reserves, or issue equity to fund CapEx.
Compare this ratio to peers in the same industry because CapEx intensity varies widely across sectors.

Free Cash Flow to Equity (FCFE) is another measure influenced by CapEx; higher CapEx generally reduces FCFE. One common form of FCFE:
FCFE = Net income − Net CapEx − Change in net working capital + Net new debt − Debt repayments

(Exact FCFE formulas vary depending on the analyst’s conventions.)

Real-world example (condensed)

Apple (FY 2023): total assets were $352.6 billion. Gross PP&E was $114.6 billion, accumulated depreciation was $70.9 billion, yielding net PP&E of about $43.7 billion. Notes to the financials break out machinery, equipment, internal-use software, and depreciation details that explain how much historic CapEx has been invested and how much has been consumed through depreciation.

Simple CF-to-CapEx example

Compare two companies:
* ABC: Cash flow from operations = $14.51 billion; CapEx = $7.46 billion → CF/CapEx = 14.51 / 7.46 ≈ 1.94
* XYZ: Cash flow from operations = $6.88 billion; CapEx = $1.25 billion → CF/CapEx = 6.88 / 1.25 ≈ 5.49

Both ratios are useful, but only when compared to industry peers and adjusted for growth stage and planned investments.

How to use CapEx in analysis

• Assess growth strategy: rising CapEx may signal expansion, new product lines, or modernization; falling CapEx could indicate consolidation, a mature business, or underinvestment.
• Evaluate capital intensity: compare CapEx to revenue, assets, or depreciation to understand asset turnover and reinvestment needs.
• Project cash requirements: incorporate expected CapEx into cash flow forecasts and capital budgeting models.
• Compare CF/CapEx across similar firms to evaluate balance between operational cash generation and investment activity.

CapEx vs. OpEx — quick comparison

• Time horizon: CapEx = long-term, OpEx = short-term/recurring.
• Accounting treatment: CapEx capitalized and depreciated; OpEx fully expensed in the period incurred.
• Tax impact: OpEx reduces taxable income immediately; CapEx reduces taxes over time via depreciation.

Common questions

Is CapEx tax deductible?
Not directly in the year of purchase. Instead, CapEx reduces taxable income over time through depreciation or amortization according to tax rules.

When is a cost capitalized rather than expensed?
Costs that create or materially extend the useful life of a long-lived asset (typically >1 year) are usually capitalized. Routine repairs and maintenance are expensed.

Is high CapEx good or bad?
It depends. High CapEx can indicate growth and investment; it can also pressure cash flow and reduce free cash to shareholders. Evaluate in context: industry norms, company lifecycle, and financing strategy.

Bottom line

CapEx reveals how much a company reinvests in its operating base. Properly interpreting CapEx—through formulas, ratios (like CF/CapEx), and comparisons to peers—helps analysts and managers assess growth prospects, capital intensity, and the company’s ability to fund long-term asset needs without jeopardizing cash flow.