CapEx Guide: How Capital Expenditures Work

The definition of capital expenditures (abbreviated CapEx) is any long-term asset purchase or investment that a business makes related to acquiring, maintaining, or upgrading physical assets or facilities. Some examples of capital expenditures include tangible assets like property, technology, plants, new equipment. CapEx also includes any intangible assets like business licenses, patents, or software. Capital assets must be long-term to qualify as a CapEx, meaning the useful life of the asset must be longer than one year.

Companies typically document capital assets on their balance sheets for any given accounting period instead of on their income statement, because these expenses are considered long-term investments. They are typically listed on a balance sheet or cash-flow statement as property, plant, and equipment (PP&E). Tracking capital costs can be a useful budgeting strategy for companies that want to track how much they are investing in new or old assets to maintain their business operations.

Identifying and calculating a company’s revenue expenditures and capital spending can be helpful to determine both how much is being spent on the company’s long-term operations and how much money is available to invest in new expenditures.

Companies often use a ratio called cash-flow-to-capital-expenditures ratio (CF-to-CapEx)—which represents the amount of money a company has available to purchase capital assets—to assess the efficacy of their CapEx spending. This ratio can be calculated simply by dividing the total cash flow from operations by their net capital expenditures. If this number is greater than one, a company generally has enough funds to purchase capital assets.

Capital expenditures will typically fall into two categories: fixed assets and intangible assets. Here are some examples of the types of capital expenditures that you might find on a company’s cash flow statement or balance sheet.

• Fixed assets: Fixed assets are long-term assets that are necessary for the long-term operations of the company. These might include corporate buildings or properties, physical technologies and hardware, furniture, vehicles, and heavy machinery.
• Intangible assets: While many of the common capital expenditures are tangible assets, some intangible assets qualify as capital expenditures, such as patents, business licenses, software, or trademarks.

Capital expenditures and operating expenses both refer to the ways that a company spends its money in order to do business. Capital expenditures are long-term investments meant to support a business's future operations, but operating expenses (OpEx) are any expenses made in the everyday business activities of a company.

Operating expenses are typically short-term assets or expenditures that have a life of less than a year. Operational expenditures might include monthly rent payments, office supplies, payroll, marketing, or research and development funds. It can be helpful for companies to evaluate their CapEx with their OpEx in mind to balance the spending on their daily operations and long-term operations.

The capital expenditures of a company are most commonly found on its cash flow statement. However, the net capital expenditures can be calculated using a simple formula. The formula for calculating a company’s net capital expenditures is the following: CapEx = Previous period PP&E - Current period PP&E + Current period depreciation. Calculating this figure is important to assess how valuable a company’s capital expenditures continue to be, in spite of any depreciation expense.

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