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Capital Expenditure

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Key Highlights

  • Capital Expenditure (CapEx) is the funds a company invests in purchasing, renovating, or replacing physical assets like buildings, machinery, technology, or equipment.

  • Types of capital expenditure includes growth and maintenance capEx.

What is Capital Expenditure (CapEx)?

Capital Expenditure (CapEx) is the funds a company invests in purchasing, renovating, or replacing physical assets like buildings, machinery, technology, or equipment. These investments are made to enhance the long-term productive capability of the company.

CapEx is not spent on everyday business expenses. Rather, it is a long-term investment in the company.

Examples of Capital Expenditure

  • Purchasing a new office building

  • Acquiring machinery for a factory

  • Replacing a computer system

  • Building a new warehouse

  • Renovating or building facilities

These assets have a lifespan of longer than one year and are reflected on the balance sheet as fixed assets.

How is CapEx Handled in Accounting?

CapEx is not completely expensed in the period when it is incurred. Rather, it is:

1. Capitalized: Reflected as an asset.

2. Depreciated or amortized: Spilled out as an expense over the useful lifespan of the asset.

For instance, when a company purchases a ₹10 lakh machine with a 10-year life, it can show ₹1 lakh as depreciation expense every year.

Types of Capital Expenditure

1. Growth CapEx: Investments for increasing operations—such as constructing a new factory.

2. Maintenance CapEx: Expenditure on replacing or repairing current assets—such as repairing faulty equipment.

CapEx in Financial Statements

  • Balance Sheet: Shown as an asset (e.g., Property, Plant, and Equipment).

  • Cash Flow Statement: Displayed under "Cash Flow from Investing Activities" as a cash outlay.

  • Income Statement: Depreciation component of CapEx only shows up, not the entire amount incurred.

CapEx Formula (From Cash Flow Statement)

One popular method of calculating CapEx is:

CapEx = Change in Net PP&E (Property, Plant, & Equipment) + Depreciation Expense

This makes it easier for analysts to determine how much a company is investing in its future operations.

Why is CapEx Important?

  • Suggests expansion: Excessive CapEx can be an indication that a firm is growing or expanding.

  • Impacts free cash flow: High CapEx takes away cash to meet dividend or debt obligations.

  • Applied in valuation: CapEx information is utilized in models such as Free Cash Flow (FCF) and DCF.

CapEx in Indian Context

CapEx is important in India in the following areas:

  • Infrastructure construction (roads, railways, power plants)

  • Expansion of industries by private sector firms

  • Government of India budget planning to drive economic growth

For instance, the Union Budget tends to draw attention to government CapEx expenditures in order to drive demand and generate employment.