CAPEX
Capital Expenditure
A company's investment in long-term assets — buildings, machinery, servers, infrastructure.
What it is
CAPEX (Capital Expenditure) is spending on the acquisition or improvement of long-term tangible and intangible assets. It is not expensed directly in the income statement but is capitalized on the balance sheet and depreciated over time.
Types of CAPEX:
- →Maintenance CAPEX: sustaining investments (without them the company would stagnate or decline)
- →Growth CAPEX: investments to expand capacity or enter new markets
For investors, distinguishing these two types matters, growth CAPEX temporarily reduces FCF but builds future earning power.
Why track it
High CAPEX reduces FCF but is not automatically bad. The key question: what return will these investments generate?
Track the CAPEX/Revenue ratio and its trend. For capital-intensive companies (telecom, manufacturing, cloud infrastructure), CAPEX can consume 15–30% of revenue.
Compare CAPEX to EBITDA or OCF, if a company invests more than it earns from operations, it must finance the gap with debt or equity issuance.
Real-world example
Watch out for
Never add CAPEX and OPEX together as "total costs"; they are different categories. CAPEX goes to the balance sheet, OPEX to the income statement. Conflating them distorts your understanding of profitability.