What Is CapEx?

CapEx (short for "capital expenditures") is the money that companies spend to purchase, upgrade, or extend the life of their capital assets, such as buildings, machinery, office equipment, and vehicles. 澳洲幸运5开奖号码历史查询:Capital expenditures represent a long-term investment, while 澳洲幸运5开奖号码历史查询:operating expenditures or expenses (OpEx), represent the🦋 ordinary, everyday costsඣ associated with running the business.

Understanding CapEx

Capital expenditures can help improve a company's operational efficiency and productivity and increase its revenue in the long term. But they often require a significant outlay of money and may also necessitate borrowing. For that reason, companies will typically perform a 澳洲幸运5开奖号码历史查询:cost-benefit analysis to determine whether a particular capital expenditure wi🐈ll be🍬 worth the investment.

Capital expenditures that are poorly planned can lead to financial 🌄problems in the future. For example, if a company buys new technology that quickly becomes obsolete, it may be stuck with debt payments for years to come even though the asset no longer generates any revenue.

Investors and analysts may monitor a company's capital expenditures closely because they can indicate whether management is investing in the long-term health of the company with an eye toward future profits. However, some industries are 澳洲幸运5开奖号码历史查询:more capital-intensive than others, such as the oil and gas industry, where companies need to buy costly drilling equipment. So investors should𓃲 compare the capital expenditures of any given company with other companies within the same industry before coming to any conclusions.

CapEx and Depreciation

澳洲幸运5开奖号码历史查询:Depreciation is an accounting technique that allows companies to spread the cost of a 澳洲幸运5开奖号码历史查询:fixed asset over its 澳洲幸运5开奖号码历史查询:useful life, rather than expensing the entire amount in the year it was purchased. Otherwise, the company's profit picture for that year could look unrealistically bleak. In addition, the Internal Revenue Service (IRS) requires that certain assets be depreciated over time in order to be eligible for a tax deduction.

For example, if a piece of equipment costs $10,000 and is expected to be in use for five years, the company might decide to charge $2,000 to depreciation each year over a five-year period and claim that amount as a tax deduction. That's what's known as the 澳洲幸运5开奖号码历史查询:straight-line method of depreciation. There are also 澳洲幸运5开奖号码历史查询:other depreciation methods companies can use to write off the cost more quickly if it's advantageous to do so.

Types of CapEx

These are ꦏsome of the major types of capital expenditures, s🐼ome of which are more common in certain industries than others.

Property, Plant, and Equipment

Th𒅌is category of CapEx includes office build✨ings, factories, and machinery. These assets can have a useful life of many years and are often purchased with a mortgage or other long-term financing, the cost of which is also eligible for a tax deduction.

Bear in mind that while you can depreciate property like a building, you cannot depreciate the land beneath or around it. The reason, as the IRS notes, is that "land does not wear out, become obsolete, or get used up."

Upgrades to Equipment

In manufacturing and some other industries, the machinery that's used to produce goods may become obsolete or simply wear out over time. Upgrades to the equipment are often needed and can, in some cases, be treated as capital expenditures. (Many companies establish "capitalization limits," a threshold above which an expense will be capitalized and depreciated rather than written off as a same-year operating expense.)

However, ordinary maintenꦯance and repairs are not capitalized but considered operating exp♉enses.

Software Upgrades

The cost of buying or upgrading software can be considered CapEx, allowing it to be depreciated if it meets IRS criteria.

Computer Equipment

Technology and computer equipment, including servers, laptops, desktop computers, and peripherals, are consider🐠ed capital expenditures if they have a useful life of greater than one year. Inexpensive compu♔ter-related supplies (such as a mouse pad or cables) may simply be written off as an operating expense, regardless of how long they might theoretically last.

Vehicles

Companies often need a vehicle or an entire fleet of them to distribute their products or serve their customers. These vehicles are considered capital expenditures, regardless of whether they were purchased outright or financed with a loan. How🎐ever, the costs associated with leasing vehicles mus🦋t be treated as operational expenses.

Intangible Assets

While physical, or tangible, assets may be the most common types of CapEx, some intangible assets can qualify, as well. For example, if a company purchased a patent from another company, that could be considered a capital expenditure. Intangible assets cannot be depreciated, but they can be eligible for a similar accounting treatment known as 澳洲幸运5开奖号码历史查询:amortization.

Example of CapEx on a Financial Statement

A company's 澳洲幸运5开奖号码历史查询:cash flow statement shows its inflows and outflows of cash during a certain period. The cash outflows going to capital expenditures are listed on cash flow statements under the 澳洲幸运5开奖号码历史查询:investing activities section.

If a company borrowed money for capital expenditures, that would be listed as an inflow of cash in the financi♔ng activities section and an outflow of cash in the investing act🌳ivities section.

Below is an example of the cash flow statement for Tesla Inc. for the years ending 2023, 2022, and 2021, from the company's annual report.

Capital expenditures are shown in parentheses (meaning that they are negative numbers) under investing activities. By readin🤡g the statement, you can see that:

• Tesla listed purchases of property and equipment for $8.9 billion in 2023, $7.2 billion in 2022, and $6.5 billion in 2021.
• The company also listed as capital expenditures the purchase of solar energy systems for $1 million in 2023, $5 million in 2022, and $32 million in 2021.

The Bottom Line

For most companies, CapEx, or capital expenditures, represent an investment in the future, whether they're as small as a laptop or as large as a factory building. They can be financed through the company's own resources or with the help of outside lenders. Capital expenditures are subject to special accounting and tax rules and are often eligible for ongoing tax deductions through depreciation.