How to Calculate CapEx - Formula, Example, and Screenshot

What is a Capital Expenditure (CapEx)?

Capital expenditure (CapEx) refers to the amount of money firms spend on acquiring or upgrading long-term assets, including both physical and certain intangible assets.

These long-term assets need to contribute to the production of goods and services for more than one year. Property, buildings, equipment, vehicles, or technology infrastructure all fall under this category.

Key characteristics of CapEx include:

Long-term: The assets should last more than one year
Capitalization: It is recorded as an asset on the balance sheet and expensed over time through depreciation (for tangible assets) or amortization (for intangible assets) over their lifespan
Non-recurring: It can be periodic or project-based, depending on the firm's investment strategy and growth plans.

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Capital Expenditure (CapEx) is the amount a firm spends on long-term, physical or intangible assets, including property, buildings, and equipment.
It would affect the financial analysis through DCF modeling. A higher CapEx generally reduces Free Cash Flow in the short term, assuming other variables remain constant.
Firms that are experiencing rapid expansion will have a higher CapEx and sometimes negative cash flow. Industries such as oil and gas, telecom, and semiconductor usually have a higher CapEx.
CapEx is shown directly on the cash flow statement under "Cash Flow from Investing" and can also be derived indirectly from changes in Property, Plant, and Equipment (PP&E) and depreciation.

Capital Expenditure (CapEx) in Financial Analysis

CapEx could be used to analyze a company’s financial status. High levels of CapEx indicate rapid expansion and potentially higher growth; however, it may also signal a significant financial burden and risk for a company.

Investors and analysts frequently monitor capital expenditures (CapEx) levels in relation to revenue, cash flow, or total assets to evaluate financial health, strategic direction, and capital efficiency.

Capital expenditures (CapEx) would also affect the valuation of a company by impacting the free cash flow (FCF):

Because Unleveraged Free Cash Flow (UFCF) subtracts CapEx from EBIT, any increase in CapEx would lower the value of UFCF.
The reduction in UFCF would then affect the result of the DCF model and hence the valuation of a company.

Types of Capital Expenditures

Capital expenditures can generally be categorized into two types, as listed in the table below:

Types of Capital Expenditures
Aspect	Maintenance CapEx	Growth CapEx
Definition	Maintenance CapEx is the capital expenditure to maintain the current functioning of equipment and prevent it from deteriorating. Non-discretionary costs	Growth CapEx is the expenditure on new equipment and firm expansion. Discretionary based on the firm’s intention to expand or not
Purpose	Maintain current production capacity Make sure production aligns with safety standards Extend the lives of existing assets and prevent deterioration	Increase current production capacity Expand to new areas of the market Diversify production Support long-term growth
Accounting	Is a recurring cost to maintain operations Subtracted from EBIT to obtain unleveraged free cash flow Used to distinguish core, sustainable cash flow	Treated as an investment for future growth Often excluded from "normalized" Free Cash Flow to determine baseline business health Affect the valuation of a company through the effects on DCF
Valuation	High maintenance CapEx reduces the true free cash flow available to shareholders and creditors. Analysts often compare maintenance CapEx vs. depreciation to check whether the company is reinvesting enough to sustain operations.	Growth CapEx signals the speed of expansion of a company; An expanding business will have a higher CapEx and potentially a negative FCF

How to Calculate Net Capital Expenditure

Capital expenditures (CapEx) can be estimated using two approaches: a direct method (via the cash flow statement) or an indirect method (via the balance sheet and income statement).

Direct Method

Let’s understand the direct method first:

Step 1: Find the Cash Flow Statement of the firm
Step 2: CapEx is typically reported under ‘Cash Flows from Investing Activities’ as “purchase of property, plant, and equipment” or similar terms

However, most times, the company would not directly disclose the figure. In this case, the indirect method is used.

Indirect Method

Next, let’s understand the indirect method:

Step 1: Find the Balance Sheet and the Income Statement of the firm
Step 2: In the Balance Sheet, find the PP&E (Property, Plant & Equipment) column
Step 3: In the Income Statement, find the Depreciation column
Step 4: Calculate the CapEx using the formula:

CapEx = Current Year PP&E - Previous year PP&E + Depreciation Expenses

When Depreciation and Amortization are incorporated into one line item, the following formula is used:

CapEx = Current Year PP&E - Previous year PP&E + New Intangible Asset - Old Intangible Asset+ Depreciation & Amortization

Capital Expenditure (CapEx) Example

Now let’s dig into an example.

Suppose we have the income statement and balance sheet of Company X, and now we want to calculate the Capital Expenditure of Company X in 2024:

Balance Sheet:

Balance Sheet
Year	2023	2024
Net PP&E	$ 700 Million	$ 750 Million

Income Statement:

Income Statement
Year	2024
Depreciation Expense	$90 Million

Step 1: Calculate the change in Net PP&E

$750 million − $700 million = $50 million

Step 2: Add back depreciation

$50 million + $90 million = $140 million

Therefore, we have calculated the CapEx for 2024 to be $140 million for Company X.

This means Company X spent $140 million on acquiring or improving fixed assets during the year.

Capital Expenditure and Industries

The level of capital expenditures (CapEx) varies significantly across industries, largely based on the degree of asset intensity in a business model.

Capital Expenditure and Industries
Industries	CapEx level
Transportation, energy, and automobile manufacturing	Intensive use of equipment, such as airlines’ spending on aircraft and oil and gas’s spending on pipeline and drilling, results in higher CapEx; The cost of maintaining and fixing this equipment also contributed to higher CapEx figures.
Semiconductor	High CapEx, because fabrication plants and chip manufacturing equipment are expensive and require continual updating; Large chipmakers, such as Intel, spend $15-$30 billion on capital expenditures (CapEx) annually.
Real Estate	Separate maintenance CapEx from growth CapEx. Maintenance CapEx is considered non-discretionary, while growth CapEx is strategically planned.
Technology/Software	Lower CapEx figures, as the operational expenditure, such as that spent on human capital and R&D, occupies a larger proportion; Nevertheless, Larger firms may have a higher level of CapEx due to spending on servers and facilities.

On the one hand, high CapEx may signal that a company is actively seeking to expand its market and production; however, it might also indicate lower dividends and reduced cash flow. On the other hand, small CapEx in capital-intensive industries may signal a contraction of investment.

Capital Expenditure vs. Operating Expenditure

Capital expenditures (CapEx) and operating expenses are both forms of company spending, but they are treated differently in accounting and have distinct implications for cash flow and valuation.

Capital Expenditure vs. Operating Expenditure
Aspect	Capital Expenditure	Operating Expenditure
Definition	CapEx refers to expenditures for acquiring or upgrading physical or intangible long-term assets. These are capitalized on the balance sheet and depreciated or amortized over time. Examples include buying a building, upgrading a factory line, or installing a new IT system.	OpEx includes expenses necessary for a business's day-to-day operations. These are expenses in the income statement for the period incurred and do not appear on the balance sheet. Examples include salaries, rent, utilities, insurance, and maintenance contracts.
Accounting Treatment	CapEx affects both the balance sheet and the cash flow statement. It does not immediately reduce net income but affects earnings over time via depreciation.	OpEx reduces net income immediately and is fully reflected in operating cash flow.
Tax Treatment	CapEx is deducted slowly over several years through depreciation, which can offer tax benefits in future periods.	Operating expenses are fully tax-deductible in the year they are incurred.
Financial Analysis	In capital-intensive businesses, analysts look closely at CapEx to assess the sustainability of cash flow and asset replacement cycles.	In service-based or tech businesses, OpEx is more important because they rely more on human capital and subscription-based software or cloud platforms.

Conclusion

Capital Expenditure is an expenditure on long-term assets such as property, buildings, equipment, or vehicles. They are long-term and non-recurring items, meaning that firms could increase their CapEx when they want to expand.

CapEx affects the valuation of a firm by affecting the free cash flow in DCF valuation. A higher CapEx potentially indicates a lower cash flow.

However, CapEx is necessary for a firm’s expansion. Generally, a firm experiencing rapid growth would have smaller or even negative Cash Flow and high CapEx.

The level of capital expenditures (CapEx) also differs by industry. For instance, CapEx is higher for industries that rely heavily on the intensive use of equipment, such as

Transportation
Telecommunications
Energy
Semiconductors

For Technology firms and software companies, the level of capital expenditures (CapEx) is generally lower.

CapEx could be divided into maintenance and growth CapEx. The Maintenance CapEx is spent to maintain the current functioning of the equipment, while Growth is spent to increase production capacity.

We can calculate CapEx indirectly from the income statement and balance sheet, as it is the sum of the change in Property, Plant, and Equipment (PP&E) and depreciation expenses. We can also obtain it directly through the Cash Flow Statement.