Capital Expenditures Definition, Formula and Examples

capital expenditure definition

Therefore, a company must understand the long-term financial implications of how its reporting will be affected and how external parties may view the company’s health as a result. 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. As part of its 2021 fiscal year end financial statements, Apple, Inc. reported total assets of $351 billion. Of this, it recorded $39.44 billion of property plant and equipment, net of accumulated depreciation.

Companies report OpEx on their income statements and can deduct OpEx from their taxes for the year when the expenses were incurred. Capital expenditures are necessary for a company to grow its current business operations. They are the part of the budget allocated to maintaining and improving the equipment and assets to keep the business running.

Capital Expenditures FAQs

The decision of whether to expense or capitalize an expenditure is based on how long the benefit of that spending is expected to last. If the benefit is less than 1 year, it must be expensed directly on the income statement. If the benefit is greater than 1 year, it must be capitalized as an asset on the balance sheet. In addition to increasing cash flow, CapEx can also help a company manage its debt. By investing in new assets, a company can reduce its debt burden and improve its financial position. This can lead to improved credit ratings and lower interest rates, which can further improve cash flow.

It’s recorded separately in a different line item on the financial statements. There are also intangible results of capital expenditures that are difficult to measure, such as the impact on employee morale or the company’s reputation. Based on this result, the company may choose to either increase or decrease the amount they spend on capital expenditures.

Capital Expenditure in Free Cash Flow

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. Once the strengths and weaknesses of previous projects are identified, steps can be taken to improve the efficiency of future projects. However, if the economy weakens or competition intensifies, the company may only see a 20% increase in production.

As stated earlier, revenue expenditures or operating expenses are reported on the income statement, which is highlighted in blue below. In other words, the cost of capital expenditures is spread out over many periods or years, whereas revenue expenditures are expensed in the current year or period. Capital expenditures and revenue expenditures refer to money spent by companies to keep their day-to-day operations going.

Capital Expenditure (CapEx) Definition, Formula, and Examples

If they spend $1,000 buying an office computer, then the CapEx is $1,000. A company’s total CapEx is the sum of all these investments in long-term assets. However, it’s equally important to understand what’s not considered CapEx.

capital expenditure definition

Analysts regularly evaluate a company’s ability to generate cash flow and consider it one of the main ways a company can create shareholder value. 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 is expensed immediately and treated as OpEx.

High Initial Costs

The cash outflows for CapEx are shown in the investing section of the cash flow statement. Where the customer is granted a lease of a property in good repair, the expenses they incur in keeping it in that state will normally be deductible. This generally includes a payment they make to their landlord at the end of their lease on account of repairs which were due but which they had not made. It isn’t necessary for all these factors to be present for the expenditure to be capital.

  • They include all the expenses that are required to meet the current operational costs of the business, making them essentially the same as operating expenses (OPEX).
  • The costs of running the machinery in it, on the other hand, would be revenue expenditures.
  • Therefore, the tax deductions in the form of Depreciation & Amortization for CapEx are spread out over several years.
  • But the cost normally remains revenue expenditure where any improvement arises only because the customer uses new materials that are broadly equivalent to the old materials.