Capital Expenditure (CapEx) Meaning, Formula, and Example

Last updated:
Capital Expenditure (CapEx) Meaning

CapEx is short for Capital Expenditure. It is a key financial metric used by analysts to understand a company's investment behavior. Read along to learn in detail what capital expenditure means and how to calculate CapEx. Discover its different types and understand how CapEx is different from revenue expenditure.

What is Capital Expenditure?

CapEx represents the money a company invests to acquire or upgrade fixed or non-consumable assets. These expenditures are essential for purchasing, enhancing, or maintaining long-term assets.

Typical capital expenditures: 

  1. Include purchasing long-term assets such as plants, equipment, buildings, machinery, furniture, and fixtures, 
  2. Cover costs for intangible assets like licenses, trademarks, or patents,
  3. Significantly impact a firm's financial status both in the short and long term, 
  4. Help companies sustain or enhance their daily operations.

CapEx is recorded on the balance sheet as an investment rather than an expense on the income statement.

Industry Dependence: The amount of CapEx a company incurs depends on its industry. Capital-intensive sectors, such as oil exploration, telecommunications, manufacturing, and utilities, tend to have higher CapEx levels.

Financial Statements: CapEx appears in the cash flow from investing activities section of the cash flow statement. Companies may refer to it as capital spending, purchases of property, plant, and equipment, or acquisition expenses.

How to Identify CapEx?

To identify CapEx, refer to the income statement and balance sheet:

  1. Find the current period's depreciation expense on the income statement.
  2. Locate the property, plant, and equipment balance for the current period on the balance sheet.

Types of Capital Expenditures (CapEx)

Various assets can provide long-term value to a company, and several types of purchases may be considered CapEx:

  1. Buildings: Used for office space, manufacturing, inventory storage, and more.
  2. Land: Can be developed or held as a speculative long-term investment, with different accounting treatments.
  3. Equipment and Machinery: Employed in manufacturing goods and converting raw materials into final products.
  4. Computers and Servers: Support company operations, logistics, reporting, and communication. Software can also be treated as CapEx in certain cases.
  5. Furniture: Furnishes office buildings, making them functional for employees, clients, and customers.
  6. Vehicles: Used for transporting goods, picking up clients, or business travel by staff.
  7. Patents: Hold long-term value if the ownership of an idea leads to successful product development.

How is Capital Expenditure Different from Revenue Expenditure?

AspectCapital ExpenditureRevenue Expenditure
NatureLong-term investmentShort-term, recurring expense
PurposeCreates assets or improves long-term assetsDoes not create assets or reduce liabilities
ExamplesPurchase of machinery, buildings, land, equipmentSalaries, interest payments, subsidies, pensions
Accounting TreatmentCapitalized and depreciated over timeExpensed in the period incurred
ImpactIncreases future earning potential and productivityCovers day-to-day operational costs
FrequencyOccasional or periodicRegular and recurring

How to Calculate Net Capital Expenditure

Net Capital Expenditure (Net CapEx) can be determined using either a direct or indirect method. The direct method involves summing up all individual expenditures, while the indirect method infers the value by examining asset values and depreciation.

Direct Method

  • Sum of amounts spent on individual assets
  • Subtract the value received from sold assets
  • The result is Net CapEx

Indirect Method

  • Current period PP&E balance
  • Subtract the previous period's PP&E balance
  • Add the current period's depreciation
  • The result is Net CapEx

Challenges with Capital Expenditures

Capital expenditure decisions are crucial but come with several complexities:

Measurement Problems

Accurately identifying, measuring, and estimating capital expenditure costs can be complex and challenging.


Large investments in capital assets are aimed at generating predictable outcomes, but these outcomes are not guaranteed. The associated costs and benefits often involve significant uncertainty, and even the best forecasts can be incorrect. During financial planning, organizations must account for risks to mitigate potential losses, even though they cannot be completely eliminated.

Negative Capex vs. Positive Capex: Understanding the Differences

AspectNegative CapexPositive Capex
DefinitionIndicates cash outflow for capital expendituresIndicates cash inflow from the sale of capital assets
ImplicationCompany is investing in new long-term assetsCompany is selling existing assets
FocusEmphasizes on improving future operations and growthMay suggest insufficient investment in maintaining operations
Cash Flow StatementShown as a negative figure (cash outflow)Shown as a positive figure (cash inflow)
Company StrategyIndicates proactive investment in future capabilitiesCould indicate divestment or a focus on short-term liquidity


  • What does CapEx mean?

  • What is the capital expenditure formula?

  • What is capital expenditure with an example?

  • What is the difference between capital and revenue expenditure?

  • What is the difference between CapEx and OpEx?