Definition:

Capital Expenditures (CapEx) refer to funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. These expenditures are made to improve the long-term productive capacity of the company.

Examples

Purchasing new machinery, upgrading existing equipment, acquiring land or buildings, and investing in infrastructure improvements.

Formula:

CapEx = Change in Property, Plant, and Equipment (PPE) + Current Depreciation

How to use the metric:

CapEx is used to assess a company's investment in its long-term assets, which can indicate growth potential and operational expansion. Analysts and investors often compare CapEx to revenue or cash flow to evaluate how effectively a company is using its resources to generate future growth.

Limitations:

CapEx does not provide insight into the efficiency or effectiveness of the investments. It can also vary significantly between industries, making cross-industry comparisons challenging. Additionally, high CapEx can strain a company's cash flow if not managed properly.

Applies to:

Industries with significant investment in physical assets, such as manufacturing, utilities, telecommunications, and transportation.

Doesn't apply to:

Industries with minimal reliance on physical assets, such as software development or consulting, where intangible assets and human capital are more critical.

Summary:

Capital Expenditures are crucial for understanding a company's investment in its long-term assets and potential for growth. While useful for assessing asset-heavy industries, CapEx must be analyzed in context, considering industry norms and the company's overall financial health.