CAPEX

What it means

CAPEX, short for capital expenditure, is money spent on acquiring fixed assets or on their capital improvement. It covers buying machinery, vehicles, buildings and servers, as well as developing or buying software the company will use for several years.

The difference from OPEX, operating expenditure, lies in how it reaches the results. OPEX is expensed straight away, while CAPEX is recorded as an asset and reaches the profit and loss statement gradually through depreciation over its useful life. A large investment in a given year therefore does not reduce profit by the full amount.

Its effect on cash flow is immediate, however: the money leaves at purchase, not gradually. That is why CAPEX is deducted when calculating free cash flow, and investors watch how much of the operating cash the company must reinvest just to keep running.

How it works in practice

When planning we distinguish maintenance CAPEX, which merely replaces worn-out assets, from growth CAPEX, which adds capacity or opens new activities. A company whose profit grows only because it has not invested in replacements for a long time looks healthier than it is.

The boundary between CAPEX and OPEX has tax and accounting rules. Tangible assets are depreciated for tax if their cost exceeds the statutory threshold and their life is over a year; smaller amounts can be expensed at once. It is equally important to distinguish capital improvement, which is capitalised, from repairs, which are expensed.

Because EBITDA excludes depreciation, a company with heavy investment can show high EBITDA and still have little free cash. For banks and investors we therefore present EBITDA together with CAPEX so they can see how much money really remains after investment.

What to watch out for

The most common mistake is expensing something that is an asset or, conversely, capitalising routine repairs. Both change the tax base, and tax audits like to challenge them, especially for construction work, renovations and IT projects.

When deciding on an investment, watch the funding: CAPEX paid from the current account can exhaust the reserve needed for wages or taxes. Larger investments are better financed with a loan or lease whose instalments match how the asset earns money.