Growth Capex

Growth capex is investment in the future. It includes building new factories, opening new stores, adding production lines, buying additional equipment to serve more customers and investing in new technology platforms.

For example, a coffee chain that spends 50 million opening 100 new stores is making growth capex. Replacing espresso machines in existing stores would be maintenance capex.

Growth capex reduces free cash flow in the short term, but it is expected to generate higher revenues and profits later. Fast-growing companies often have high growth capex and low or negative free cash flow, even if their underlying businesses are healthy.

Investors try to separate growth capex from maintenance capex to understand a company's true earning power. A company with large free cash flow after maintenance capex, but low free cash flow after growth capex, may be investing heavily for future growth rather than struggling.

The value of growth capex depends on the returns it generates. Investments that earn more than the company's cost of capital create value, while those that earn less destroy it, even if they make the company bigger.