what are capital expenditures capex 
capital expenditures capex are funds used by a company to acquire upgrade and maintain physical assets such as property plants buildings technology or equipment capex is often used to undertake new projects or investments by a company making capital expenditures on fixed assets can include repairing a roof if the useful life of the roof is extended purchasing a piece of equipment or building a new factory this type of financial outlay is made by companies in an effort to increase the scope of their operations or to add some future economic benefit to the operation investopedia laura porterunderstanding capital expenditures capex capex can tell you how much a company invests in existing and new fixed assets to maintain or grow its business it s any type of expense that a company capitalizes or shows on its balance sheet as an investment rather than on its income statement as an expenditure capitalizing an asset requires that the company spread the cost of the expenditure over the useful life of the asset the amount of capital expenditures a company is likely to have depends on its industry some of the most capital intensive industries have the highest levels of capital expenditures they include oil exploration and production telecommunications manufacturing and utility industries capex can be found in the cash flow from investing activities in a company s cash flow statement companies can highlight capex in various ways you may see it listed as capital spending purchases of property plant and equipment pp e or acquisition expenses you can also calculate capital expenditures using data from a company s income statement and balance sheet find the amount of depreciation expense recorded for the current period on the income statement locate the current period s property plant and equipment line item balance on the balance sheet find the company s pp e balance from the prior period take the difference between the two to find the change in the company s pp e balance add the change in pp e to the depreciation expense for the current period to arrive at the company s current period capex spending types of capexmany types of assets can attribute long term value to a company several types of purchases may be considered capex formula and calculation of capexcapex pp e current depreciationwhere capex capital expenditures pp e change in property plant and equipment begin aligned text capex delta text pp e text current depreciation textbf where text capex text capital expenditures delta text pp e text change in property plant and equipment end aligned capex pp e current depreciationwhere capex capital expenditures pp e change in property plant and equipment capital expenditures are also used in calculating free cash flow to equity fcfe this is the amount of cash available to equity shareholders the formula for fcfe is fcfe ep ce d 1 dr c 1 dr where fcfe free cash flow to equityep earnings per sharece capexd depreciationdr debt ratio c net capital change in net working capital begin aligned text fcfe text ep text ce text d times 1 text dr delta text c times 1 text dr textbf where text fcfe text free cash flow to equity text ep text earnings per share text ce text capex text d text depreciation text dr text debt ratio delta text c delta text net capital change in net working capital end aligned fcfe ep ce d 1 dr c 1 dr where fcfe free cash flow to equityep earnings per sharece capexd depreciationdr debt ratio c net capital change in net working capital alternatively it can be calculated as fcfe ni nce c nd drwhere ni net incomence net capexnd new debtdr debt repayment begin aligned text fcfe text ni text nce delta text c text nd text dr textbf where text ni text net income text nce text net capex text nd text new debt text dr text debt repayment end aligned fcfe ni nce c nd drwhere ni net incomence net capexnd new debtdr debt repayment the greater the capex is for a firm the lower the fcfe special considerationsthe capex metric is used in several ratios for company analysis in addition to analyzing its investment in its fixed assets the cash flow to capital expenditures cf to capex ratio relates to a company s ability to acquire long term assets using free cash flow the cf to capex ratio will often fluctuate as businesses go through cycles of large and small capital expenditures a ratio greater than 1 0 could mean that the company s operations are generating the cash necessary to fund its asset acquisitions a ratio of less than 1 0 may indicate that the company is having issues with cash inflows and its purchase of capital assets a company with a ratio of less than one may have to borrow money to fund its purchase of capital assets capex vs operating expenses opex capital expenditure shouldn t be confused with operating expenses opex operating expenses are shorter term expenses that are required to meet the ongoing operational costs of running a business operating expenses can be fully deducted from the company s taxes in the same year in which the expenses occur unlike capital expenditures an expense is considered to be capex when the asset is a newly purchased capital asset or an investment that has an expected life of more than one year or it improves the useful life of an existing capital asset the cost is typically deducted fully in the year the expense is incurred however if the expense maintains the asset in its current condition such as a repair 1examples of capexapple inc aapl reported total assets of 352 6 billion as part of its 2023 fiscal year end financial statements it recorded 43 7 billion of property plant and equipment of this amount net of accumulated depreciation 2these balances are dictated by generally accepted accounting principles gaap the rules treatment and policies a company must follow when accounting for capex usually mirror apple s treatment apple s balance sheet aggregates all property plant and equipment into a single line but more information on property plant and equipment is often required to be reported within the notes to the financial statements this supplementary information explains that apple has a gross ppe of 114 6 billion with 78 3 billion made up of machinery equipment and internal use software 3the property plant and equipment balance is reduced by its accumulated depreciation balance apple has utilized 70 9 billion of the 114 6 billion of capex in this example the book value of this category of capex is valued at 43 7 billion 3example of how to use capexlet s say abc company had 7 46 billion in capital expenditures for the fiscal year compared to xyz corporation which purchased pp e worth 1 25 billion for the same fiscal year the cash flow from operations for abc company and xyz corporation for the fiscal year was 14 51 billion and 6 88 billion respectively cf to capex is calculated as follows cf capex cash flow from operationscapexwhere cf capex cash flow to capital expenditure ratio begin aligned text cf capex frac text cash flow from operations text capex textbf where text cf capex text cash flow to capital expenditure ratio end aligned cf capex capexcash flow from operations where cf capex cash flow to capital expenditure ratio abc s cf to capex is as follows using this formula 14 51 billion 7 46 billion 1 94 begin aligned frac 14 51 text billion 7 46 text billion 1 94 end aligned 7 46 billion 14 51 billion 1 94 xyz s cf to capex is as follows 6 88 billion 1 25 billion 5 49 begin aligned frac 6 88 text billion 1 25 text billion 5 49 end aligned 1 25 billion 6 88 billion 5 49 it is important to note that this is an industry specific ratio and should only be compared to a ratio derived from another company with similar capex requirements 