How to Calculate Capital Expenditures (CapEx)

Capital expenditures (CapEx) are funds companies use to acquire, upgrade, and maintain physical assets. These investments support a business’s long-term growth and operational capabilities. Calculating CapEx helps assess a company’s investment in its future.

Understanding Capital Expenditures

Capital expenditures refer to funds businesses use to purchase or significantly improve long-term physical assets, such as property, buildings, technology, or equipment. These assets are expected to provide economic benefits for more than one accounting period, typically exceeding one year. CapEx enhances a company’s capacity, efficiency, or expands its operations.

CapEx differs from operating expenses (OpEx), which are short-term, day-to-day costs for running a business. OpEx includes employee salaries, rent, utilities, and office supplies. CapEx is capitalized on the balance sheet and depreciated over time, while OpEx is expensed directly on the income statement. For example, purchasing a new delivery truck is CapEx, but its fuel is OpEx.

Identifying Capital Expenditure Items

Expenditures that materially enhance an asset’s value, extend its useful life, or increase its productive capacity qualify for capitalization. The asset must also have a useful life beyond one year. This means the benefit from the expenditure is expected to last for multiple future accounting periods.

Common capital expenditure items include the acquisition of new property, plant, and equipment, such as land, buildings, machinery, and vehicles. Significant improvements or additions to existing assets that extend their useful life or boost their efficiency are also capitalized. For example, a major renovation that allows a building to serve more customers or a machine upgrade that increases its output would be CapEx. Development costs for new intangible assets, such as capitalized software development or acquired patents, are also classified as capital expenditures. Major repairs that improve an asset’s condition or extend its life are also capitalized, unlike minor repairs that maintain its current condition.

Calculating Capital Expenditures

Calculating capital expenditures can be approached in several ways, depending on the available financial data and the purpose of the analysis. Each method provides insight into a company’s investment in its long-term assets.

One straightforward method for external analysis involves using the cash flow statement. CapEx is found under the “Investing Activities” section of a company’s cash flow statement. Look for line items such as “Purchases of Property, Plant, and Equipment” or similar descriptions, representing the capital expenditures for the period. This section shows the cash outflows related to the acquisition and disposal of long-term assets, offering a clear picture of direct investments.

A second method uses data from both the balance sheet and the income statement. This indirect approach derives CapEx by analyzing changes in the net Property, Plant, and Equipment (PPE) balance, adjusted for depreciation and any asset disposals. The formula is: Current Period Net PPE – Prior Period Net PPE + Current Period Depreciation Expense + Disposals (at cost).

To apply this, locate the Net PPE values on the balance sheet for the current and prior periods. The depreciation expense can be found on the income statement or within the operating activities section of the cash flow statement. Details regarding asset disposals are disclosed in the financial statement footnotes. This formula accounts for how capital investments increase PPE and how depreciation reduces its book value over time.

For internal tracking, a direct summation method is used. This involves totaling all individual capital expenditures made during a specific period. This method aggregates the costs of all qualifying assets acquired or improved, as identified by internal purchase orders, invoices, and project records. It requires meticulous record-keeping to ensure all material expenditures meeting the capitalization criteria are accurately included. This approach provides a detailed view of where capital funds have been allocated across projects and asset categories.

The most suitable method for calculating CapEx depends on whether the analysis is for internal management purposes or external financial review. External parties rely on published financial statements, making the cash flow statement or the balance sheet/income statement method more practical. Internal stakeholders, with access to detailed accounting records, can utilize the direct summation method for precise project tracking and capital budgeting.