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. It is often used to undertake new projects or investments by the firm.

Examples

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

Formula:

CapEx = ΔPP&E + Current Depreciation Expense

where ΔPP&E is the change in property, plant, and equipment from one accounting period to the next.

How to use the metric:

CapEx is used to assess a company's investment in its physical assets, which can indicate growth potential and operational efficiency. Analysts and investors use CapEx to evaluate how much a company is investing in its future operations and to compare it with its competitors.

Limitations:

CapEx does not provide immediate returns and can strain cash flow. It may not reflect the efficiency or productivity of the investments. Additionally, it can vary significantly between industries, making cross-industry comparisons challenging.

Applies to:

Industries with significant physical asset requirements, such as manufacturing, utilities, telecommunications, and transportation.

Doesn't apply to:

Service-based industries with minimal physical asset needs, such as software, consulting, and other professional services, because these industries rely more on human capital and intangible assets.

Summary:

Capital Expenditures (CapEx) are essential for understanding a company's investment in physical assets and future growth potential. While useful for assessing asset-heavy industries, it has limitations in service-oriented sectors and does not immediately impact financial performance.