Overview
The relationship between annual Capital Expenditures and Depreciation & Amortization (D&A) expense provides insights into a company’s investment cycle, growth phase, and reinvestment rate. D&A reflects the cost allocation of past Capex, while current Capex represents new investment.
Common Scenarios:
- Growing Company:
- Typically, Capex > D&A.
- Reason: The company is investing significantly in new assets (Growth Capex) to expand capacity, exceeding the depreciation charge on its existing, historical asset base.
- Stable/Mature Company:
- Generally, Capex ≈ D&A (over the long term).
- Reason: Investment is primarily focused on replacing existing assets as they wear out (Maintenance Capex), roughly matching the annual depreciation charge.
- Declining/Underinvesting Company:
- Potentially, Capex < D&A.
- Reason: The company might be reducing its asset base or failing to reinvest sufficiently to maintain its assets, leading to spending less than the depreciation charge.
Significance
- Helps assess whether a company is expanding, maintaining, or potentially shrinking its asset base.
- Crucial for forecasting future asset levels and Free Cash Flow (FCF).
See also: Capital Expenditures (Capex), Depreciation & Amortization (D&A), Property, Plant & Equipment (PP&E), Free Cash Flow (FCF)