Any amount spent by a business on purchasing, maintaining, or improving assets is referred to as a capital expenditure, or CapEx. So, what is CapEx? We’ll answer that below. Learning more about the CapEx formula is vital not only to keep track of your expenditures, but also to analyse which were most profitable from an investment perspective.
What is CapEx?
Capital expenditure (CapEx) refers to any amount spent by a company on fixed, tangible assets. It’s also called capital expense. Fixed assets include any that will be used in the future, beyond the current accounting period. Examples could include assets like property, land, electronics, vehicles, or equipment and machinery. Most companies will use CapEx when it’s time to refresh an old project or start a new one, with the idea that it will generate profit.
Capital expenditures are listed as expenses, shown with a negative value on the cash flow statement for each accounting period. Yet CapEx is also represented as an asset on the balance sheet. Any assets purchased will depreciate over time, though this will depend on the type of asset and its use. Depreciation is then deducted from overall taxes.
How to calculate CapEx
In many cases you won’t need to calculate CapEx, because the value will be shown on your company’s income statement, cash flow statement, and balance sheet. However, here’s how to calculate CapEx to gain a better understanding of where this figure comes from.
Look at your company’s financial documents from the past two years to find the values needed for the calculation.
Subtract fixed assets from the previous year from the fixed assets listed for the most recent financial year. This will show you the change in fixed assets.
Subtract the value of intangible assets, because CapEx only uses tangible asset expenses.
Subtract accumulated depreciation from the previous year from the accumulated depreciation for the most recent year. This will give you the most recent amount of total depreciation.
Add back the total depreciation to the change in fixed assets you calculated in Step 2. This shows you the total amount of capital expenditures.
You can use the following CapEx formula to gain a better visual idea of how these steps work:
CapEx = PP&E (Current Period) – PP&E (Prior Period) + Depreciation (Current Period)
Note that PP&E stands for property, plant and equipment, which appears as a line item on your balance sheet. This figure represents fixed, tangible assets.
How to use the CapEx formula
Now that you’ve worked out the CapEx formula, what can you do with it? This information is handy when it comes to planning for the financial future. By looking at your company’s past capital expenditure, you can see how much money you’ve already invested in existing fixed assets and whether or not the expenditure has paid off.
CapEx vs. OpEx
It’s also helpful to look at the differences between CapEx and OpEx. OpEx stands for operating expenses, or those required for everyday business functions. While capital expenditures are meant to create future benefits and should be seen as long-term investments, operating expenses are treated differently for accounting purposes.
The main difference between CapEx and OpEx is that operating expenses involve function-related business operations. OpEx includes administrative expenses, the cost of goods sold, and research and development costs. By contrast, CapEx often uses collateral or debt to purchase big-ticket assets or intangible assets like patents.
When looking at CapEx vs OpEx, you’ll need to understand how they’re recorded on the financial statements. Operating expenses are recorded during the period they were incurred, and are recorded on the income statement rather than the balance sheet. You don’t need to factor in depreciation as you would with CapEx, because these are everyday operating costs rather than long-lasting assets.
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