Capital Expenditure (CapEx)
Definition of 'Capital Expenditure (CapEx)'
When companies update or acquire physical or tangible assets, funds are needed, often referred to as capital expenditure (CapEx). In some cases CapEx is used to embark upon new projects or make a corporate investment.
TheStreet Explains ‘Capital Expenditure (CapEx)’
CapEx is vital to many companies in order to maintain and/or improve corporate operations. For the accounting department, the capital expenditure is the expense required for a new tangible asset that is vital to the company’s viability. This could include heating and cooling equipment for a restaurant, roof repair at a physical location or merchandising updates to enhance operations. The capital expenditure is considered to be a fixed cost that is amortized on the balance sheet as the tangible asset depreciates. Company growth is easier if a company can finance itself through capital expenditures.
Each company has varying capital expenditures based on the industry. For instance, a retailer may have higher CapEx on the balance sheet versus a fintech company. Industries that often have the highest capital expenditures are oil and gas companies and manufacturing companies. Unlike operating expenses, capital expenditures or revenue expenditures address only the physical pieces of equipment or items needed to run a business. Revenue expenditures and operating expenditures are similar in that they are both short-term expenses used to run a business and cover a broader base such as employee salaries, marketing and daily expenses.
Important to note, that while revenue expenses are tax-deductible, capital expenditures are not. Using the cash flow to capital expenditure ratio, companies can determine a company’s ability to free cash flow to acquire long-term assets. Free cash flow is the cash a company can produce after it has spent money on tangible assets (CapEx). Capital expenditure can be used to calculate the free flow of cash using the calculation: net income - net CapEx - change in net working capital + new debt - debt repayment. The more capital expenditure the less free flow of cash to equity.
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