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CAPEX – Capital Expenditure

CAPEX - Capital Expenditure

Capital expenditure, also known as capital expense (CAPEX) is defined as the expenses used by companies in acquiring assets for a long term, or making renovations or upgrades which will not be exhausted in a short while.

For example, in textile industry, the expenses for the machines and their repairmen are the capital expenditures, as well as the buying of more machines to expand the company.

The CapEx of a company is exempt from the tax deductions. They are added to a company’s assets, whose value depreciates with each passing year.

Capital expenses are used by businesses to achieve a significant return on investment (ROI) and to initiate future cash flow.

Importance of Capital Expenditure

CapEx is used extensively by businesses in the cash flow statement. The decisions regarding capital expenditures are the most important decisions made by a company because they provide the structure for future activities. Once a decision is made for CapEx, it becomes irreversible. Therefore, great care must be taken to make the right capital investment decision. It is important for a company to determine whether its expenses should be capitalized or expensed.

Capital expenditures are for long-term purposes; hence, their effects are extended over a period of time. This factor is used by investors to determine if a company is highly efficient or not, if it is under investing, if it has higher future spending and if the margins are low.

What is Included in Capital Expenditure?

The expenses in capital expenditure are non-recurring in nature. They are utilized to gain physical assets such as:

  • Start up of a new business
  • Restoring the company’s property
  • Updating the company’s property
  • Adapting the company’s property to a different use
  • Updating an asset belonging to the company
  • Obtaining fixed assets
  • Repairing assets of the company

Ratio of Cash Flow to Capital Expenditure

The cash flow to capital expenditure ratio is a very important ratio which describes the ability of a company to obtain assets for long term using the free cash flow.

The ratio of cash flow to capital expenditure (CF/CapEx) is given by:

CF/CapEx=(Cash flow from operations)/(Capital expenditures )

If the CF/CapEx ratio increases, it means that the company is financially stable to afford assets, and hence, can be on its way to future growth.


Further Reading


Economic comparison of open pond raceways to photo bio-reactors for profitable production of algae for transportation fuels in the Southwest
www.sciencedirect.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Economic viability of a reverse engineered algae farm (REAF)Economic viability of a reverse engineered algae farm (REAF)
www.sciencedirect.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Corporate CAPEX and market capitalization of firms on Malawi stock exchange: an empirical studyCorporate CAPEX and market capitalization of firms on Malawi stock exchange: an empirical study
www.emerald.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Financial feasibility analysis of NAABB developed technologiesFinancial feasibility analysis of NAABB developed technologies
www.sciencedirect.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

The role of internally financed capex in rising Chinese corporate debtsThe role of internally financed capex in rising Chinese corporate debts
link.springer.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Parametric CAPEX, OPEX, and LCOE expressions for offshore wind farms based on global deployment parametersParametric CAPEX, OPEX, and LCOE expressions for offshore wind farms based on global deployment parameters
www.tandfonline.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

SDN-enabled infrastructure sharing in emerging markets: CapEx/OpEx savings overview and quantificationSDN-enabled infrastructure sharing in emerging markets: CapEx/OpEx savings overview and quantification
ieeexplore.ieee.org [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Does the market value innovative investments? A comparison of CAPEX with investments in R&D and ITDoes the market value innovative investments? A comparison of CAPEX with investments in R&D and IT
papers.ssrn.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Economic fundamentals, capital expenditures and asset dispositionsEconomic fundamentals, capital expenditures and asset dispositions
link.springer.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …

Grid parity in tidal stream energy projects: An assessment of financial, technological and economic LCOE input parametersGrid parity in tidal stream energy projects: An assessment of financial, technological and economic LCOE input parameters
www.sciencedirect.com [PDF]
… Monte Carlo simulation framework that has been used extensively in the agricultural economics literature [13 … AISIM's financial feasibility analysis extends beyond techno-economic analyses … and balance sheet, as well as simulating annual debt servicing costs on CAPEX as well …



Q&A About CAPEX – Capital Expenditure


What is capital expenditure?

Capital expenditure, also known as capital expense (CAPEX) is defined as the expenses used by companies in acquiring assets for a long term or making renovations or upgrades which will not be exhausted in a short while.

How do you determine whether an expense should be expensed or capitalized?

Expenses should be expensed if they can be directly attributed to revenue generating activities; otherwise, they should be capitalized.

Why are CAPEX considered to be non-recurring?

Because they are utilized to gain physical assets that have long-term effects on the company's cash flow.

What are some examples of CAPEX?

Examples of CAPEX include machinery and equipment, real estate, and intangible assets such as patents.

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