What Is CAPEX (Capital Expenditure)?

 


CAPEX (Capital Expenditure) Explained



What Is CAPEX (Capital Expenditure)?

Capital Expenditure (CAPEX) refers to the money a company spends on acquiring, upgrading, or maintaining physical assets such as buildings, equipment, or technology.
In short, CAPEX shows how much a business invests in its future growth and efficiency.

Table of Contents

  1. Definition of CAPEX

  2. CAPEX Formula

  3. Examples of CAPEX

  4. Importance of CAPEX

  5. CAPEX vs OPEX

  6. Pros and Cons

  7. Conclusion

1. Definition of CAPEX

CAPEX is the investment in long-term assets that help a company grow or stay competitive.
It includes purchases like machinery, new facilities, or technology upgrades — all aimed at future production or expansion.

2. CAPEX Formula

CAPEX = Δ(PP&E) + Depreciation Expense

  • PP&E = Property, Plant, and Equipment.

  • This formula shows how much the company invested in new assets after accounting for depreciation.

3. Examples of CAPEX

  • Building a new factory

  • Buying new vehicles or machines

  • Upgrading IT infrastructure

  • Expanding retail stores

  • Investing in renewable energy equipment

4. Importance of CAPEX

  • Growth Indicator: High CAPEX often signals expansion.

  • Competitiveness: Keeps technology and equipment up to date.

  • Productivity: Improves efficiency and output.

  • Long-Term Value: Builds foundation for future revenue.

5. CAPEX vs OPEX

CategoryCAPEXOPEX
DefinitionLong-term investmentDaily operating cost
DurationMulti-year benefitShort-term expense
AccountingCapitalizedExpensed immediately
ExamplesBuilding, equipmentRent, salaries, utilities
ImpactFuture growthDay-to-day operation

6. Pros and Cons

Pros:
✅ Supports growth and innovation
✅ Builds long-term competitiveness
✅ Increases production capacity

Cons:
⚠️ Requires large upfront cost
⚠️ May increase debt
⚠️ Benefits take time to appear

7. Conclusion

CAPEX is a key measure of a company’s long-term vision and financial strength.
While high CAPEX means a business is investing in growth, it must balance spending carefully to avoid financial strain.

Source:
Investopedia – Capital Expenditure (CAPEX)


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