Also known as PPE or plant, property and equipment on the balance sheet, the capex formula stands for the ‘capital expenditure’ formula and is the funds a company uses to upgrade or acquire any assets that are physical such as equipment, industrial buildings or property. In other words, this refers to money spent for maintaining and acquiring a company’s physical assets. Companies make this type of outlay to increase or maintain the operations’ scope. Expenditures such as these can include a lot of things such as building a brand new factory or doing roof repair. As a general rule, the amount of capex a company has is usually dependent on its occupied industry. Industries that are the most capital intensive include utilities, telecom and oil. Also, manufacturing companies tend to have larger capex because compared to service firms; manufacturers spend more money on maintenance. For companies rich in technology, capex can also include the cost of system or product development.
Here is a course called A Walk Around the Market that is a complete investing foundation course you might be interested in.
No matter how you look at it, capex is a number familiar to those in investments to gauge a company’s future revenue generating. Low capex may equal lower expenses, but in the future, will this company be able to compete with peers in the industry? Here is a course called Investing Fundamentals that shows you the ropes about investment fundamentals if this is something you are interested in.
How Much Are You Spending?
When it comes to accounting, expenses are considered to be capital expenditures when assets improve the useful life of an existing capex or it is a newly purchased capex. If expenses are considered capex, this will need capitalization. In other words, the company will be required to spend the expenditure’s cost over the asset’s useful life. However, if the expense maintains the current condition of an asset, the cost is fully deducted in the expense year. Here is a course called Basic Investment Concepts that shows you various investment strategies and knowing your objectives. Also, here is an article called Why Investment Appraisals Are Important that gives you a clue about whether or not an investment will be profitable in the long run.
- Whether you need to analyse, compete or invest in a company, it is always a good skill to know what the capital expenditure is. To do this, the best approach is using the capex formula. The first thing you need to do is to obtain the target company’s financial statement as of the year’s end for the past couple of years. Specifically, you want the balance sheet. If there are additional company notes about future outlays of capex, you can use this as well.
- Find the change in total assets from last year to this year. The fixed asset net amount listed in the finance statements of the year before should then be subtracted from the fixed asset net amount for the year that just ended.
By doing this, you get the net change in assets that are fixed. On the other hand, this needs to be further adjusted as well:
- Out of the calculation, remove all intangible assets. It is assumed that your only interest is in the tangible assets expenditures, so you won’t need the intangible assets. Plus, many intangibles were a result of acquisition rather than a capex program.
- Remove all obtained assets that come from a reporting period acquisition. Information such as this should not be listed in the accompanying notes of the finance statement.
3. The next step is finding the liabilities’ total also known as accumulated depreciation. The accumulated depreciation total amount listed on the preceding year finance statement needs to be subtracted from the total accumulated depreciation amount listed for the year that just ended. This results in the year that just ended depreciation total amount. In the income statement of the year that just ended, you will find an alternative for the depreciation expense. This amount must not list any associated depreciation with assets acquired or any amortization.
4. Add the years’ total depreciation to the fixed assets net amount change. This is the amount total spent by the company on expenditure for capital during the period of measurement. So if you subtract total liabilities change from total assets change, say in this example:
$250,000 (assets) – $100,000 (liabilities/depreciation) = $150,000 (total capex of the year)
Hope this helps! Here is a course called Finance Boot Camp for Entrepreneurs that shows you how a profitable company is built.