Capital expenditure (CapEx): Definition, calculation, and examples

Capital expenditure (CapEx) refers to the money a company spends on acquiring, upgrading, or maintaining long-term physical assets such as buildings, equipment, or technology. These investments typically provide value for multiple years rather than immediate consumption.

Business leaders who grasp CapEx principles make better decisions about resource allocation and growth opportunities. Proper CapEx management directly affects cash flow, tax obligations, financial reporting accuracy, and the company's ability to scale operations sustainably.

What is capital expenditure?

Capital expenditure (CapEx) is money you spend to acquire, upgrade, or maintain long-term physical assets. These investments in fixed assets provide value beyond 1 fiscal year, unlike operating expenses that cover day-to-day costs.

CapEx typically includes three main categories of assets known as PP&E:

• Property: Land and buildings
• Plant: Manufacturing facilities and infrastructure
• Equipment: Machinery, vehicles, and technology

Recognizing what qualifies as CapEx helps you categorize expenses correctly, plan budgets effectively, and comply with accounting standards such as generally accepted accounting principles (GAAP).

CapEx calculation formula

The core formula for calculating CapEx is:

CapEx = PP&E (Current Period) – PP&E (Prior Period) + Depreciation Expense

You add depreciation back because it represents the value of assets consumed during the period. Without adding it back, you'd understate your actual capital spending since depreciation reduces PP&E on the balance sheet but doesn't represent a cash outflow.

Direct method

Use the direct method when you have access to actual purchase records. This approach works best for internal tracking where you know exactly what assets you bought and sold. The direct method formula is:

Net CapEx = Cost of Asset 1 + Cost of Asset 2 + ... – Price of Assets Sold

For example, if you purchased equipment for $50,000 and a vehicle for $30,000, then sold old machinery for $10,000, your net CapEx would be $70,000.

$50,000 + $30,000 – $10,000 = $70,000

Indirect method

The indirect method uses the core formula and is the standard approach when analyzing companies from the outside using financial statements. You'll pull PP&E from the balance sheet and depreciation from the income statement.

In practice, this indirect capex calculation can differ from the cash flow statement when a company has asset disposals, reclassifications, impairments, or business combinations. These events can change net PP&E without representing new capital spending. If your result doesn’t tie closely to “Purchases of property, plant, and equipment,” scan the investing section and footnotes for proceeds from asset sales and other PP&E-related line items that explain the variance.

This method is most common for external analysis because financial statements are publicly available, while detailed purchase records typically aren’t.

How to calculate CapEx step by step

Here's a practical walkthrough using the indirect method. We'll use these example numbers: Beginning PP&E of $10,000, ending PP&E of $15,000, and depreciation expense of $20,000.

1. Locate PP&E on the balance sheet

Find net property, plant, and equipment for both the current and prior periods. This line item is typically listed under non-current assets or long-term assets. Make sure you're using net PP&E (after accumulated depreciation), not gross PP&E.

2. Calculate the change in PP&E

Subtract prior period PP&E from current period PP&E. This shows the net change in asset value on your books.

Using our example: $15,000 – $10,000 = $5,000 change in PP&E

3. Find depreciation expense

Locate depreciation expense on the income statement, usually under operating expenses. You can also find it in the notes to financial statements or on the cash flow statement as an add-back to net income.

In our example, depreciation = $20,000.

4. Apply the CapEx formula

Combine the components using the formula:

CapEx = Change in PP&E + Depreciation

CapEx = $5,000 + $20,000 = $25,000

A positive result indicates cash outflow to acquire assets. In this case, the company spent $25,000 on capital expenditures during the period.

5. Verify against the cash flow statement

Cross-check your calculation by looking at purchases of property, plant, and equipment under investing activities on the cash flow statement. This figure should match or closely approximate your calculated CapEx. Any significant variance may indicate asset disposals or acquisitions you need to account for.

Where to find CapEx on financial statements

CapEx data appears across multiple financial statements. Knowing where to look makes your analysis faster and more accurate.

Cash flow statement

This is your most direct source. Look under cash flow from investing activities for line items labeled purchases of property, plant, and equipment or capital expenditures. The number appears as a negative (cash outflow) and represents actual cash spent on fixed assets.

Balance sheet

The PP&E line item under non-current assets shows the cumulative value of fixed assets. You'll need both current and prior period values, plus depreciation expense, to back-calculate CapEx using the indirect method.

CapEx vs. OpEx

Understanding the difference between CapEx and OpEx is essential for accurate financial reporting and tax planning. Here's how they compare:

Types of capital expenditures

Capital expenditures fall into two main categories based on their purpose. Understanding this distinction helps you interpret what your CapEx numbers actually mean for your business.

Maintenance CapEx

Maintenance CapEx is spending required to keep current operations running and replace worn-out assets. This includes replacing broken machinery, upgrading outdated equipment to meet safety standards, or routine facility repairs that extend an asset's life.

If your CapEx roughly equals your depreciation expense, you're likely just maintaining your existing asset base without expanding capacity.

Growth CapEx

Growth CapEx is spending to expand capacity or capabilities. This includes purchasing additional delivery vehicles, building new manufacturing facilities, or acquiring equipment to enter new markets.

If your CapEx exceeds depreciation, you're investing in growth. You can calculate growth CapEx specifically:

Growth CapEx = Total CapEx – Depreciation

Examples of capital expenditures

Capital expenditures span a wide range of investments depending on your industry and business needs:

• Real estate: Office space, warehouses, retail locations, land purchases
• Machinery and equipment: Manufacturing equipment, production lines, industrial tools
• Vehicles and fleet: Delivery trucks, company cars, specialized transport
• Technology and infrastructure: Servers, network equipment, major software implementations
• Furniture and fixtures: Office buildouts, leasehold improvements, retail displays

How CapEx affects financial statements

CapEx creates a ripple effect across all 3 financial statements. Understanding these connections helps you see the full picture of how capital investments affect your financial position.

• Balance sheet: Increases PP&E (assets); may increase liabilities if financed through debt
• Income statement: No immediate effect; depreciation expense is recognized over the asset's useful life, gradually reducing net income
• Cash flow statement: Reduces cash from investing activities, showing the actual cash outflow for asset purchases

This interconnected effect explains why financial analysts track CapEx closely when evaluating a company's investment strategy and financial health.

How CapEx affects taxes

CapEx isn't immediately deductible on your taxes. Instead, you depreciate the cost over the asset's useful life, spreading the tax benefit across multiple years. Common depreciation methods include straight-line (equal amounts each year) and accelerated methods (larger deductions in early years).

However, two important exceptions allow faster write-offs:

• Section 179: Lets you deduct the full purchase price of qualifying equipment and software in the year you buy it, up to annual limits
• Bonus depreciation: Allows you to deduct a significant percentage of qualifying asset costs in the first year, with the remainder depreciated normally

These provisions can significantly affect your tax planning, so consult with your tax advisor to determine which approach makes sense for your situation.

When to capitalize vs. expense a purchase

Deciding whether to capitalize a purchase as CapEx or expense it immediately as OpEx depends on three key criteria:

• Useful life: Does the asset provide benefit beyond one year? If yes, it's typically capitalized.
• Dollar threshold: Does it exceed your company's capitalization policy? Most organizations set a minimum amount (often $1,000–$5,000) below which purchases are expensed regardless of useful life.
• Nature of spend: Is it an acquisition or improvement, or a repair or maintenance? New assets and significant improvements are capitalized; routine repairs are expensed

When in doubt, consider whether the spending extends the asset's life or increases its value (capitalize) versus simply maintaining its current condition (expense).

What is a good CapEx ratio?

There is no single “good” capex ratio that applies to every business. Appropriate levels of capital spending vary widely based on industry, growth stage, and business model. Capital-intensive industries such as manufacturing, utilities, and transportation typically require higher capex than service-based or software businesses.

One commonly used benchmark is the capex-to-depreciation ratio. A ratio close to 1.0 suggests a company is primarily replacing existing assets. A ratio consistently above 1.0 may indicate investment in growth, while a ratio below 1.0 can signal underinvestment or a shrinking asset base.

Another useful metric is the capex-to-revenue ratio, which measures capital spending relative to sales. This ratio helps assess how much reinvestment is required to support a given level of revenue and is most meaningful when comparing companies within the same industry.

Operating cash flow-to-CapEx ratio (Operating cash flow / CapEx) shows whether a company can fund capital spending from its core operations. A result above 1.0 generally suggests operating cash flow can cover capex without relying heavily on financing, while a result below 1.0 may indicate the business is funding capex through debt, equity, or existing cash reserves.

Best practices for CapEx budgeting

Effective CapEx management requires clear processes and regular oversight. Here's how to get it right.

Establish clear capitalization thresholds

Set a dollar amount above which purchases must be capitalized. This creates consistency across your organization and simplifies decision-making for your team. Document the threshold in your accounting policies and communicate it clearly.

Create a standardized approval workflow

Define who approves CapEx requests at different spend levels. A $5,000 equipment purchase might need only a department manager's approval, while a $500,000 facility expansion requires executive sign-off. Automate routing to reduce bottlenecks and maintain audit trails.

Track CapEx by department or project

Categorize spending for better visibility into where capital is being deployed. This helps you identify which areas are driving investment and whether spending aligns with strategic priorities.

Align CapEx with strategic goals

Tie capital requests to business objectives. Every significant CapEx proposal should explain how it supports growth initiatives, improves efficiency, or addresses a specific business need. This discipline helps prioritize competing requests.

Review and adjust quarterly

Compare actual CapEx to budget regularly. Reallocate unused funds to higher-priority projects or request additional budget when opportunities arise. Quarterly reviews keep your capital allocation responsive to changing business conditions.

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