Capital Expenditure

Capital expenditure, often called CapEx, is spending on assets that will benefit the business for more than a year. Instead of being recorded as an expense straight away, it is added to property, plant and equipment on the balance sheet and gradually charged to the income statement through depreciation.

For example, if a bakery spends 60,000 on a new oven expected to last ten years, the full 60,000 is CapEx. The income statement shows depreciation of about 6,000 a year rather than a single expense of 60,000.

CapEx is shown in the investing section of the cash flow statement, because it is real cash leaving the business, even though it does not reduce profit all at once.

Analysts distinguish between maintenance CapEx, which keeps existing operations running, and growth CapEx, which expands capacity. Free cash flow is usually calculated as operating cash flow minus CapEx, so high CapEx needs can significantly reduce the cash available to owners.