CAPEX or Capital Expenditure Ratio Analysis

What do you mean by Capital Expenditure? CAPEX

CAPEX is an expenditure incurred for the company for acquiring and upgrading business, land and building, Machinery or equipments. The usage of these assets shall be more than one year to be considered under capital expenditure. CapEx are expensed by way of depreciation over a period of assets life usually from 5 to 10 years as per tax authority’s guidelines. Capital expenditure needs differs from industry to industry for example Airlines has heavy CapEx compared to Technology companies. The capital expenditure decisions the management makes comes with future growth prospects and the need for currents assets upgradation to match rising demand and quality to note as few.

 

Where do you find capital expenditures?

Capital expenditures are found on the Cashflow Statement of the company under Investing Activities, where the details on money spend on acquiring or repairing of the all assets are recorded for the year.

 

How do you calculate Capital Expenditure?

CapEx formula = PP&E (new) – PP&E (old) + Depreciation

This essentially means the net capital expenditure the company made in a given year. To calculate we add New PP&E expenditure during the year, which can be found in Cash Flow statement of the company under the head “Investing Activities”. Then deduct the same with last years PP&E as per company’s financial statements and add back the current year Depreciation to arrive a CapEx for the Current year.

 

While analysing the CapEx it also makes sense to notice whether the company is able to meet its CapEx expenses from its Cash Flows during the year or the company is borrowing from outside to manage its CapEx cycle. However, in most of the cases we may find companies borrow funds to fulfil its CapEx plans this stands true if the company’s growth is way higher and cashflow may not essentially support a rapid growth plans. On the other side if the company is not growing in at least double digits and still unable to meet its CapEx plans there may be a problem in management efficiency and more detailed analysis needs to be done.

 

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Author: dwapp