How to Calculate Capex From the Balance Sheet

Capital expenditure (CAPEX) represents funds a company uses to acquire, upgrade, and maintain physical assets like property, plants, buildings, technology, or equipment. These investments improve operational efficiency, expand capacity, or extend asset life. Deriving CAPEX from financial statements provides insight into a company’s investment strategies and commitment to future growth. This article guides readers through calculating CAPEX using balance sheet information, revealing its significant role in a company’s financial health.

Identifying Key Balance Sheet Accounts

The primary balance sheet account for capital expenditure is “Property, Plant, and Equipment” or PP&E. PP&E represents tangible long-term assets a company owns and uses, such as land, buildings, machinery, and vehicles. These assets are held for use over multiple accounting periods.

On the balance sheet, PP&E is reported “net” of accumulated depreciation. Accumulated depreciation represents the total depreciation expense charged against these assets. This accumulated amount reduces the original cost of the assets, reflecting their declining book value. To calculate capital expenditure, locate the net PP&E figures for two consecutive reporting periods from the company’s balance sheet.

The Capital Expenditure Calculation Formula

The formula for deriving capital expenditure from changes in PP&E on the balance sheet is: CAPEX = (Ending Net PP&E – Beginning Net PP&E) + Depreciation Expense for the period. Ending Net PP&E is the value at the end of the current period; Beginning Net PP&E is from the preceding period.

Depreciation expense must be added back to the change in net PP&E to determine capital expenditure. Depreciation is a non-cash expense that allocates an asset’s cost over its useful life, reducing its book value without cash outflow for new assets. Including depreciation ensures the calculation isolates only cash outlays for new asset acquisitions or improvements during the period. Depreciation expense is found on a company’s income statement or statement of cash flows, rather than directly on the balance sheet.

Applying the Calculation: A Practical Example

Consider a hypothetical company’s financial data to illustrate the capital expenditure calculation. Assume Ending Net PP&E of $550,000 for the current year and Beginning Net PP&E of $500,000 from the prior year’s balance sheet. Depreciation Expense is $40,000 for the current period.

First, calculate the change in Net PP&E. Subtracting the Beginning Net PP&E from the Ending Net PP&E yields a $50,000 increase ($550,000 – $500,000). This figure represents the net change in asset book value.

Next, add back the Depreciation Expense to this change. Adding the $40,000 depreciation expense to the $50,000 change in Net PP&E results in a capital expenditure of $90,000. This figure shows how much a company is spending to maintain or grow its operational capacity.