Capital Expenditure (CapEx)

Capital expenditures, often called CapEx, are expenses for long-lived assets such as machinery, buildings, or vehicles. Unlike ongoing operating costs, they have an effect over many years. They show how much a company invests in its asset base and future growth.

In accounting they are capitalised and, where their useful life is finite, depreciated over that life, so they affect the income statement only indirectly through depreciation, but hit cash flow immediately and in full. In the cash flow statement they therefore appear under investing activities, and free cash flow is operating cash flow less capital expenditure. For assessing a business the split is decisive: maintenance capex merely preserves existing capacity and is effectively unavoidable, while expansion capex funds additional growth and can be deferred if necessary. A rough guide is the comparison with depreciation: where investment stays persistently below depreciation, this may indicate erosion of the asset base. Asset age, price changes and the nature of earlier investments also need to be considered.

Capex as a share of revenue is also commonly used and varies widely by sector, from a few percent in software and services to double-digit levels in industry. The boundary with leasing and rental matters, because the same economic use appears either as investment or as ongoing expense depending on the contract. Under IFRS 16 leases are generally recognised on the lessee's balance sheet, while German GAAP focuses more on attribution of economic ownership. In transactions future investment needs are regularly underestimated, so due diligence separately reviews asset age, maintenance history and postponed projects.

A frequently underestimated point is the boundary between costs that must be capitalised and ongoing maintenance, since both cause the same cash outflow but affect reported earnings differently. A capitalisation practice that has changed over the years is therefore a review point. For planning, future needs are usually derived from the asset register, age and useful life and compared with historical figures. For companies with volatile investment behaviour an average across several years is preferable to a single reference year.