CAPEX

Capital Expenditures (CAPEX)

Capital Expenditures, or CAPEX, is the money that companies spend to buy or upgrade their long-term assets like buildings, factories, technology, and equipment. These are significant purchases expected to help the company grow over the years.

Unlike everyday expenses (OPEX), which show up on the income statement, CAPEX appears on the balance sheet because they are seen as investments for the future.

Common Types of CAPEX

• Buying Property: Purchasing land, buildings, and other real estate.
• Purchasing Equipment: Getting machinery, vehicles, computers, and other important tools for the business.
• Construction and Renovation: Building new structures or fixing up old ones, like office buildings or production areas.
• Acquiring Intangible Assets: Paying for things like patents, copyrights, trademarks, and software that will be useful for a long time.
• Research and Development (R&D): Sometimes money spent on creating new products or technology can be counted as CAPEX if it leads to a long-term asset, though it’s usually considered OPEX.
• Leasehold Improvements: Costs for improving a property you are leasing, especially if it’s a long-term lease.
• Capitalized Interest: Interest paid on loans for big projects, which can be added to the cost of the asset.
• Legal and Licensing Fees: Costs for getting licenses, permits, or legal help related to acquiring an asset.
• Installation Costs: Money spent to set up things like machinery or network infrastructure.
• Training and Implementation: Costs of training staff or rolling out new systems or technology.
• Environmental Compliance: Spending to meet environmental regulations or to improve sustainability, like installing pollution control equipment.
• Asset Maintenance and Upgrades: Major maintenance jobs and upgrades that extend the life or improve the usefulness of an asset can be counted as CAPEX.

How expenses are handled can vary based on accounting rules. Companies must follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). It’s a good idea to get advice from accountants or financial advisors to ensure expenses are reported correctly as CAPEX or OPEX.

How to Calculate CAPEX

Calculating CAPEX is simple with this formula:

CAPEX = PPE_end – PPE_start + Depreciation expense

Here’s what each part means:

• PPE: Property, Plant, and Equipment.
• PPE_end: The value of PPE at the end of the period, found on the balance sheet.
• PPE_start: The value of PPE at the beginning of the period, also from the balance sheet.
• Depreciation Expense: The total depreciation for the period, found on the income statement or cash flow statement.

This formula accounts for new investments in assets (seen in the change in PPE) and includes depreciation, which is a non-cash expense that reduces the book value of PPE but doesn’t actually take cash out of the company’s pocket.