Capital expenditure, or CapEx, is the money a company spends to acquire, upgrade or maintain long-term physical assets such as property, plant and equipment. Unlike operating expenses, CapEx is not fully deducted in the year it is incurred; instead it is capitalised on the balance sheet and expensed gradually through depreciation over the asset's useful life. CapEx appears in the investing section of the cash flow statement.
Worked example
A company buys machinery for 100,000 with a 10-year useful life and no salvage value. The full 100,000 is recorded as CapEx and capitalised on the balance sheet. Using straight-line depreciation, the income statement is charged 100,000 ÷ 10 = 10,000 per year, so only 10,000 — not the whole 100,000 — hits profit in year one.
Why it matters
CapEx matters because it shows how much a company is investing to sustain or grow its asset base, and free cash flow is calculated by subtracting CapEx from operating cash flow. The pitfall is distinguishing maintenance CapEx, which merely keeps existing assets running, from growth CapEx, which expands capacity; lumping them together can make a company look cheaper or more capital-intensive than it really is.
Frequently asked questions
CapEx buys long-term assets and is capitalised then depreciated over years, while OpEx (operating expenses) covers day-to-day running costs and is fully expensed in the period incurred. CapEx affects the balance sheet and cash flow from investing; OpEx hits the income statement directly.
CapEx is reported in the investing activities section of the cash flow statement, often labelled "purchases of property, plant and equipment." You can also estimate it as the period change in gross fixed assets plus depreciation.