Technical / Capital
Capital Expenditures (CapEx)
CapEx explained: how companies invest in long-term assets, where it flows in financial statements, and why it matters for valuation.
"Growth consumes cash. It is the nature of the beast." — Phil Knight, Shoe Dog
Concept
Capital Expenditures (CapEx) are cash outflows a company makes to acquire, upgrade, or maintain long-term physical assets—property, plants, equipment, sometimes intangibles. Unlike operating expenses that hit the income statement immediately, CapEx gets capitalized onto the balance sheet as an asset and expensed gradually through depreciation. It represents investment in future productive capacity, not current period consumption.
Intuition
CapEx tells you how much cash a company is reinvesting in its own infrastructure. High CapEx relative to revenue signals either aggressive growth or a capital-intensive business model (airlines, utilities, manufacturing). Low CapEx could mean a mature business throwing off cash—or a company underinvesting and mortgaging its future. The key insight: CapEx doesn't reduce reported earnings immediately, but it does reduce cash immediately. This disconnect is why a company can report strong net income while hemorrhaging cash, or vice versa.
Components
Growth CapEx vs. Maintenance CapEx
What It Is
Growth CapEx funds expansion—new factories, additional equipment, capacity increases. It's discretionary spending aimed at future revenue growth.
Maintenance CapEx keeps existing assets functional—replacing worn machinery, repairing facilities. It's non-discretionary; skip it and your operations degrade.
How to Calculate It
Companies rarely disclose the split. Common approximations:
- Maintenance CapEx ≈ Depreciation (assets replaced at roughly the rate they wear out)
Interview Script
Capital Expenditures are cash outflows used to acquire, upgrade, or maintain long-term physical assets like property, plant, and equipment. Unlike operating expenses that hit the income statement immediately, CapEx is capitalized on the balance sheet and expensed gradually through depreciation—which is why a company can report strong net income while cash is actually declining, since CapEx reduces cash immediately but not earnings.