Capital expenditures (“capex”) are investments made to acquire or enhance the value of long-term productive assets.
Capital expenditures are not expensed on the income statement. Rather, capital expenditures are “capitalized” into the asset section of the balance sheet. Capital expenditures also appear within the cash flow statement under the cash flow from investing section. Capital expenditures represent a use rather than a source of cash.
There are two categories of capital expenditures: maintenance capex and growth capex. Maintenance capex represents expenditures to replace existing assets. For example, if a company replaces an old delivery truck with a new one. In contrast, if a company acquires an additional truck, the expenditure is considered growth capex because it expands the company’s operating capacity.
Companies are not required to disclose the breakdown between maintenance and growth capex within the cash flow statement. However, public companies often provide supplementary information in the accounting footnotes or in the Management’s Discussion and Analysis (MD&A) section of the annual report which allows statement users to calculate the components of capex.
Companies may acquire long-term assets by paying cash. More often, however, companies acquire long-term assets with debt financing. When companies use debt financing to acquire assets, the expenditure affects both the investing and financing sections of the cash flow statement and both the assets and liabilities sections of the balance sheet.
Capex is important for equity investors and creditors, who incorporate capex into their cash flow forecasts.
