# Capital Expenditure (CapEx): Definitions, Formulas, and Real-World Examples

Capital expenditures (CapEx) are the funds companies allocate to acquire, upgrade, and maintain essential physical assets like property, technology, or equipment, crucial for expanding operational capacity and securing long-term economic benefits. By investing in fixed assets, such as building a new factory or upgrading technology, companies aim to enhance their operations, ensuring sustained growth and competitive advantage. CapEx decisions reflect strategic intent, positioning businesses to [leverage new opportunities](https://www.investopedia.com/terms/r/ronic.asp) and optimize their physical infrastructure.

### Key Takeaways

*   Capital expenditures (CapEx) are funds companies use to acquire, upgrade, or maintain physical assets like buildings, technology, or equipment, with the goal of increasing operational scope or future economic benefits.
*   CapEx is listed as an investment on a company's balance sheet and can be calculated by adding current depreciation to the change in property, plant, and equipment (PP&E).
*   Industries that are capital-intensive, such as oil, telecommunications, and manufacturing, tend to have higher levels of CapEx due to the substantial investment in fixed assets required for maintenance and growth.
*   CapEx differs from operating expenses (OpEx) as it involves longer-term investments and is capitalized on the balance sheet, whereas OpEx are short-term recurring expenses that are fully tax-deductible in the year they occur.
*   The cash flow-to-capital-expenditures (CF-to-CapEx) ratio measures a company's ability to generate enough cash flow from its operations to fund its asset acquisitions, where a ratio above 1.0 indicates sufficient cash flow.

![Capital Expenditure](https://www.investopedia.com/thmb/GPgh6T1XaiUGrVjHMFDodbS9_fw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/capitalexpenditure-b2aaeae25f3648f9929b8e86061eff63.png)

*— Investopedia / Laura Porter*

## Understanding 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.

A company's industry influences the amount of CapEx it requires. 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.

You can find CapEx in the investing activities section of a company's cash flow statement. Companies can highlight CapEx in various ways. It may be listed as capital spending, [PP&E purchases](https://www.investopedia.com/terms/p/ppe.asp), 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](https://www.investopedia.com/terms/d/depreciation.asp) 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 current depreciation expense to find the company's CapEx for the period.  

## Different Types of Capital Expenditures

Various assets contribute long-term value to a company, and many purchases qualify as CapEx:

*   **Buildings** may be used for office space, manufacturing of goods, storage of inventory, or other purposes.
*   **Land** may be used for further development. Accounting treatment can vary for land that's specifically held as a speculative long-term investment.
*   **Equipment** and machinery may be used to manufacture goods and convert [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp) into final products for sale.
*   **Computers** or **servers** may be used to support a company's operational aspects, including the logistics, reporting, and communication of operations. Software may also be treated as CapEx in certain circumstances.
*   **Furniture** can be used to furnish an office building, making the space usable by staff, clients, and customers.
*   **Vehicles** may be used to transport goods and pick up clients or by staff for business purposes.
*   **Patents** can hold long-term value if the right to own an idea comes to fruition through product development.  
    

## Calculating Capital Expenditures: Formula and Method

$\begin{aligned} &\text{CapEx} = \Delta \text{PP\&E} + \text{Current Depreciation} \\ &\textbf{where:}\\ &\text{CapEx} = \text{Capital expenditures} \\ &\Delta \text{PP\&E} = \text{Change in property, plant, and equipment} \\ \end{aligned}$

Capital expenditures are also used in calculating [free cash flow to equity](https://www.investopedia.com/terms/f/freecashflowtoequity.asp) (FCFE). This is the amount of cash available to equity shareholders. The formula for FCFE is:

$\begin{aligned} &\text{FCFE} = \text{EP} - ( \text{CE} - \text{D} ) \times ( 1 - \text{DR} ) - \Delta \text{C} \times ( 1 - \text{DR} ) \\ &\textbf{where:}\\ &\text{FCFE} = \text{Free cash flow to equity} \\ &\text{EP} = \text{Earnings per share} \\ &\text{CE} = \text{CapEx} \\ &\text{D} = \text{Depreciation} \\ &\text{DR} = \text{Debt ratio} \\ &\Delta \text{C} = \Delta \text{Net capital, change in net working capital} \\ \end{aligned}$

Alternatively, it can be calculated as: 

$\begin{aligned} &\text{FCFE} = \text{NI} - \text{NCE} - \Delta \text{C} + \text{ND} - \text{DR} \\ &\textbf{where:}\\ &\text{NI} = \text{Net income} \\ &\text{NCE} = \text{Net CapEx} \\ &\text{ND} = \text{New debt} \\ &\text{DR} = \text{Debt repayment} \\ \end{aligned}$  

> **Important**
>
> The greater the CapEx is for a firm, the lower the FCFE.

## Key Considerations in Capital Expenditure Analysis

The 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](https://www.investopedia.com/ask/answers/112814/what-are-some-examples-main-types-capital-expenditures-capex.asp).

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.  

## Capital Expenditures vs. Operating Expenses: Key Differences

Capital expenditure shouldn't be confused with [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp) (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.

## Real-World Examples of Capital Expenditures

Apple, Inc. ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=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](https://www.investopedia.com/terms/a/accumulated-depreciation.asp).

![Apple 2023 Balance Sheet](https://www.investopedia.com/thmb/T8X0JiV2zy21vlMvarLBGoBCsQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-02-08at4.09.42PM-3725144217c44ef9b822d2824374f7b4.png)

**

These 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.

![PPE Apple](https://www.investopedia.com/thmb/ECugVoWfiy1UNsza9sqmeBLj_UY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-02-08at4.13.21PM-e4791de6172346199ffd5c26729fdf49.png)

**

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.

The 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.

![PPE Notes 2023 Apple](https://www.investopedia.com/thmb/7-MVGTHuAlWaTTTM1tSpW2322to=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-02-08at4.15.58PM-65a0ae2ced7649869d6f4368dc9e6a82.png)

**

## Example of How to Use CapEx

Let'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:

$\begin{aligned} &\text{CF/CapEx} = \frac { \text{Cash Flow from Operations} }{ \text{CapEx} } \\ &\textbf{where:}\\ &\text{CF/CapEx} = \text{Cash flow to capital expenditure ratio} \\ \end{aligned}$

ABC's CF-to-CapEx is as follows using this formula:

$\begin{aligned} &\frac { \$14.51\ \text{Billion} }{ \$7.46\ \text{Billion} } = 1.94 \\ \end{aligned}$

XYZ's CF-to-CapEx is as follows:

$\begin{aligned} &\frac { \$6.88\ \text{Billion} }{ \$1.25\ \text{Billion} } = 5.49 \\ \end{aligned}$

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.

## What Type of Investment Is CapEx?

CapEx is the investments that a company makes to grow or maintain its business operations. Capital expenditures are less predictable than operating expenses that recur consistently from year to year. Buying expensive equipment is considered CapEx, which is then depreciated over its useful life.

## Is CapEx Tax Deductible?

While CapEx isn't directly tax-deductible, it can indirectly lower taxes through generated depreciation. A company could include $100,000 of depreciation expense each year for 10 years if it purchases a $1 million piece of equipment with a useful life of 10 years. This depreciation would reduce the company’s pre-tax income by $100,000 annually, reducing its income taxes.

## What Is the Difference Between CapEx and OpEx?

The key difference between capital expenditures and operating expenses is that operating expenses recur on a regular and predictable basis such as rent, wages, and utility costs. Capital expenses occur much less frequently and with less regularity. Operating expenses are shown on the income statement and are fully tax-deductible. Capital expenditures only reduce taxes through the depreciation they generate.

## What Is an Example of CapEx?

The purchase is often capitalized and treated as CapEx when a company acquires a vehicle to add to its fleet. The cost of the vehicle is depreciated over its useful life and the acquisition is initially recorded on the company's balance sheet.

This is treated differently than OpEx, such as the cost to fill up the vehicle's gas tank. The tank of gas has a much shorter useful life to the company so it's expensed immediately and treated as OpEx.

## The Bottom Line

Capital expenditures are purchases made by a company and capitalized on a balance sheet rather than being fully expensed at the time of purchase. Assets that are capitalized can be accounted for over their useful lifetime and depreciated. CapEx can tell you how much a company invests in existing and new fixed assets to maintain or grow its business.  

> **Article Sources**
>
> 1.  CFI Education. "[Capital Expenditure (CapEx)](https://corporatefinanceinstitute.com/resources/accounting/capital-expenditure-capex/)."
>     
> 2.  Apple. "[Form 10-K for the Year Ending Sept. 30, 2023](https://s2.q4cdn.com/470004039/files/doc_earnings/2023/q4/filing/_10-K-Q4-2023-As-Filed.pdf)." Page 30.
>     
> 3.  Apple. "[Form 10-K for the Year Ending Sept. 30, 2023](https://s2.q4cdn.com/470004039/files/doc_earnings/2023/q4/filing/_10-K-Q4-2023-As-Filed.pdf)." Page 39.
>     
> 4.  Internal Revenue Service. "[Topic No. 704, Depreciation](https://www.irs.gov/taxtopics/tc704)."