Capital expenditure (CAPEX) is an expenditure incurred by a company to create or enhance the value of its long-term assets. These assets may include physical property, such as factories, land, and equipment, or intangible assets, such as patents or copyrights.
CAPEX is a key metric in assessing a company’s financial health, since it represents the amount of money that the company is investing in its future growth. A high level of CAPEX can be a sign that a company is confident in its future prospects and is willing to make the necessary investments to fuel its growth. Conversely, a low level of CAPEX can be a sign that a company is not investing enough in its future and may be at risk of stagnation.
Examples of CAPEX include money spent on:
- Building a new factory
- Purchasing new machinery
- Acquiring a new company
- Developing a new product
CAPEX is typically financed through a combination of debt and equity. Debt financing is typically in the form of bonds, while equity financing is typically in the form of shares. CAPEX is different from operating expenditure (OPEX), which is incurred in the day-to-day running of a business.
Examples of OPEX include money spent on:
- Marketing Research and development
CAPEX is a non-cash expense, which means that it is not recorded on a company’s balance sheet. Instead, it is recorded on the company’s income statement as a deduction from revenue. The amount of CAPEX a company incurs can have a significant impact on its financial statements. For example, a company with a high level of CAPEX will typically have a lower net income and lower earnings per share (EPS) than a company with a low level of CAPEX.
CAPEX can also impact a company’s cash flow. A company with a high level of CAPEX will typically have negative free cash flow (FCF), which means that it is spending more cash than it is generating. CAPEX is an important metric for investors to watch, as it can give insights into a company’s growth strategy and its financial health.