Capital Expenditures (CapEx)
The cash spent by a company on acquiring or upgrading physical assets like equipment, buildings, and technology. Necessary for growth but reduces free cash flow.
Capital Expenditures, or CapEx, are cash outlays for acquiring, constructing, or upgrading long-term assets such as factories, equipment, buildings, technology, and infrastructure. CapEx is necessary for growth but reduces the cash available for shareholders.
Formula
Capital Expenditures = Purchases of Assets - Sales of Assets
Found on the cash flow statement under "investing activities." It's the net cash spent on capital assets.
Example
Meta Platforms (META) spends $30 billion annually on data centers, servers, AI infrastructure, and technology. This is capex. Tesla (TSLA) spends billions building and upgrading factories. These investments are necessary for future growth but reduce the cash available for dividends or buybacks today.
How to Interpret It
- High capex relative to revenue: The company is in growth mode or is capital-intensive (airlines, utilities, manufacturers). Less free cash for investors now, but building for future profits.
- Low capex: Either the company is mature with stable assets (like a software company with low infrastructure needs) or it's failing to invest in growth.
- Rising capex: Growth phase. The company is reinvesting heavily for expansion.
- Declining capex: Mature phase or cost-cutting, which might signal lower future growth.
- CapEx as % of revenue: A useful metric to compare capital intensity across companies. Tech companies often have 2-5% capex; utilities might be 15-20%.
Limitations
- High capex today is supposed to generate profits tomorrow, but it's not guaranteed; bad investments destroy shareholder value.
- Some companies manipulate capex timing to make cash flow look better in specific quarters.
- R&D spending (on intellectual capital) is expensed, not capitalized, so capex doesn't capture all investment in growth.
- CapEx requirements vary wildly by industry; comparing capex between a tech company and a utility is not meaningful.
Related Terms
- Free Cash Flow — operating cash flow minus capex
- Operating Cash Flow — cash from operations before capex
- Depreciation — non-cash expense reducing reported earnings
- Return on Assets — profit generated per dollar of asset investment