Definition
Capital Expenditures (Capex) represent funds invested by a company to acquire, upgrade, maintain, or improve its long-term physical Assets necessary for operations. These assets include items like Property, Plant & Equipment (PP&E), buildings, machinery, technology infrastructure, and vehicles.
Purpose
- Capex reflects investments required to sustain current operations (maintenance) or expand the company’s productive capacity (growth).
Financial Statement Impact
- Cash Flow Statement: Recorded as a cash outflow (use of cash) within the Cash From Investing (CFI) section.
- Balance Sheet: Increases the gross value of Property, Plant & Equipment (PP&E) or other long-term assets.
- Income Statement: While the Capex outflow itself doesn’t hit the IS immediately, the acquired assets are subsequently depreciated over their useful lives, with Depreciation & Amortization (D&A) expense recognized on the IS.
Types (Common Distinction)
- Maintenance Capex: Spending needed to maintain the existing level of operations (e.g., replacing worn-out equipment).
- Growth Capex: Spending aimed at increasing capacity, efficiency, or entering new markets (e.g., building a new factory, buying significant new software platforms).
Relevance to Valuation
- Capex is a critical input for Free Cash Flow (FCF) calculations, representing necessary reinvestment in the business.
- It’s a key reason why EBITDA is considered only a proxy for cash flow, as EBITDA ignores this significant cash outflow.
See also: Property, Plant & Equipment (PP&E), Cash Flow Statement, Balance Sheet, Depreciation & Amortization (D&A), Free Cash Flow (FCF), EBITDA