Capital Expenditure (CapEx)
Use the Capital Expenditure (CapEx) Calculator → Try the Capital Expenditure (CapEx) Quiz →Capital Expenditure (CapEx) is spending on physical assets - property, plant, and equipment - that will be used for more than one year. It appears on the cash flow statement, not the income statement.
- CapEx is spending on assets with a useful life greater than one year; it is capitalised on the balance sheet and expensed gradually as depreciation, not immediately as an income statement cost.
- Maintenance CapEx keeps existing assets running; growth CapEx expands capacity or enters new markets.
- Free Cash Flow = Operating Cash Flow minus CapEx, making CapEx the primary deduction from operating cash flow.
- In a mature business, maintenance CapEx should roughly equal annual depreciation and amortization.
- A SaaS company may convert 90%+ of EBITDA to free cash flow; a telecom operator may convert only 25-35% because of its heavy CapEx requirements.
What is Capital Expenditure (CapEx)?
Capital Expenditure (CapEx) is money spent to acquire, upgrade, or maintain physical assets - property, buildings, machinery, equipment, and technology infrastructure - that will be used for more than one year. Unlike operating expenses, which flow through the income statement immediately, CapEx is capitalised on the balance sheet and expensed gradually as depreciation over the asset's useful life.
CapEx is categorised as maintenance CapEx (spending to keep existing assets operational) or growth CapEx (spending to expand capacity or enter new markets). Growth CapEx is an investment in future revenue; maintenance CapEx is essentially a cash cost of running the current business.
Because EBITDA excludes depreciation, it effectively excludes CapEx as well - making EBITDA a poor proxy for free cash flow in capital-intensive businesses. A telecom company or manufacturer with high EBITDA but equally high maintenance CapEx may generate very little actual free cash.
Capital Expenditure (CapEx) explained to a beginner
Think of buying a delivery van for $50,000. You do not expense the whole $50,000 in month one - you put it on the company's asset list and charge $10,000 a year for five years as depreciation. That initial $50,000 payment is CapEx: spending on something that will be used for years, not just this month.
Compare that to paying $500 for printer paper. You expense it immediately - that is OpEx. The distinction matters because CapEx does not reduce this year's profit, but it does consume cash. A business can look highly profitable on paper while quietly running out of cash if it is spending heavily on CapEx.
When to use Capital Expenditure (CapEx)
Use CapEx analysis when assessing whether a business's EBITDA is truly convertible to cash (low CapEx = high conversion; high CapEx = lower conversion). Maintenance CapEx should be roughly equal to annual D&A in a mature business. If CapEx consistently exceeds D&A, the business is growing its asset base.
Worked examples for Capital Expenditure (CapEx)
This table quickly gives you the overview you need to understand Capital Expenditure (CapEx) and its most important comparisons.
| Company type | Annual EBITDA | CapEx | Free Cash Flow | FCF Conversion |
|---|---|---|---|---|
| SaaS company | $5,000,000 | $200,000 | $4,800,000 | 96% |
| Manufacturer | $5,000,000 | $2,000,000 | $3,000,000 | 60% |
| Telecom operator | $5,000,000 | $3,500,000 | $1,500,000 | 30% |
Common pitfalls
CapEx can be deferred in the short term, making free cash flow appear temporarily strong. A business that delays maintenance CapEx will eventually need to spend more to repair degraded assets. Always review multi-year CapEx trends rather than a single year's figure.
Frequently asked questions about Capital Expenditure (CapEx)
What is the difference between CapEx and OpEx?
CapEx is spending on long-lived assets (>1 year useful life) that appears on the balance sheet and is expensed via depreciation. OpEx is spending on day-to-day operations that flows through the income statement immediately. The distinction affects reported profit: CapEx has no immediate income statement impact; OpEx reduces profit in the period incurred.
Is software CapEx or OpEx?
It depends. Purchased software licences are typically CapEx. Cloud/SaaS subscriptions are typically OpEx. Internally developed software can be either, depending on the development stage and accounting policy (US GAAP ASC 350-40 governs this).
How does CapEx relate to Free Cash Flow?
Free Cash Flow = Operating Cash Flow − CapEx. CapEx is the primary deduction from operating cash flow to arrive at FCF. A business that generates strong operating cash flow but has heavy CapEx requirements will have thin FCF despite healthy earnings.
Quiz: how well do you know CapEx?
1. How does CapEx differ from operating expenses (OpEx) on the financial statements?
2. From the examples table, which company type achieves the highest FCF conversion on $5,000,000 EBITDA?
3. What does the whenToUse section say maintenance CapEx should roughly equal in a mature business?
4. What does the pitfalls section warn about deferring maintenance CapEx in the short term?
5. According to the FAQ, what standard governs whether internally developed software is treated as CapEx or OpEx?