Capital Expenditures (CAPEX) are funds used by a company to acquire, upgrade, or maintain physical assets with a useful life beyond one year, such as property, plant, and equipment (PP&E). The cost is capitalized on the balance sheet and then allocated to expense over the asset’s useful life through depreciation or amortization (D&A).
CAPEX decisions are part of capital budgeting and project evaluation. They affect future productive capacity and efficiency and are reported in the cash flow statement under investing activities. When a company purchases a factory, upgrades machinery, or adds software that qualifies as a capital asset, the cash outlay increases CAPEX and the asset value on the balance sheet. Over time, D&A reduces pretax income on the income statement, while the initial cash outlay affects cash flow.
CAPEX is weighed against expected returns, cost of capital, and ongoing maintenance needs. It contrasts with operating expenses (OPEX), which are expensed in the period incurred. Analysts look at measures such as capital intensity, free cash flow (FCF), and payback considerations to assess how CAPEX supports long-run cash generation.
In the latest annual report, Company Y reports CAPEX related to a new production line; the asset is recorded at purchase price and depreciated over its estimated useful life.
A company records a $20 million CAPEX outlay for a new manufacturing facility; the cash outlay increases CAPEX in the cash flow statement and the asset is placed on the balance sheet and depreciated over its useful life.
CapEx (Capital Expenditures) · Depreciation and amortization (D&A) · OPEX (Operating Expenses) · Free cash flow (FCF) · Cash flow from investing activities (CFI) · Capital budgeting · Property, plant and equipment (PP&E)