Investing for Beginners , investing

Capex (capital expenditure) is company’s investment in long-term assets that are needed to continue the business or for future’s growth. The perfect examples of capital expenditure can be an acquisition of new manufacturing machine or a construction of a building that will be used for company’s business. Basically, capex is any new long-term assets that are going to be used for more than one year. If some equipment is bought only for short term use, it should be recognized as expense (opex) and should go straight to the income statement. While investments in long-term assets are capitalized and depreciated every year until the book value of an asset becomes zero. Different assets are depreciated over different period. For example, computers might be written off in 2-3 years, while depreciation of the building is much slower and might be 25-60 years depending on the property type. Usually the period of the depreciation is disclosed in the accounting principles of each company. 

Capex calculation

Most of the times you don’t really need to calculate capex, but if you need to find out what company’s capital expenditure is, then you have to find financial statements of the company and look at the cash flow statement. In the cash flow statement there is a column as ‘investing activities’ or ‘cash flow from investing activities’ and you should be able to find capex in this column. It should be named as purchase of property, plant and equipment (PPE) or similarly. 

What are the needs for capex?

Every company has different needs for capex. Usually, fast growing companies require more capex than stable ones. Also it depends on the sector. For example, such sectors as utilities, telecoms, chemical companies, and pharmacy may require large capex investments in the initial phase, but when the main investments are finished, capex decreases if there are no future growth plans. Normally, company’s managers try to control capex very strictly as this one reduces free cash flow of the company.

Capital expenditure should be compared to depreciation to predict its needs in the company. Stable businesses require fewer investments in capex compared to the depreciation. If capex exceeds depreciation, it may mean few things: 

• A company has future growth plans and invests in some assets on this purpose. 

• Company’s assets are outworn and they need to be replaced to continue the business successfully.