Capex (capital expenditure), in Spanish capital expenditure, is the investment in capital or fixed assets that a company makes either to acquire, maintain or improve its non-current assets.
It is explained as the investment necessary to maintain or expand capital assets (factories, machinery, vehicles, etc.). It is very important within the activity of a company and its future evolution.
We know that the future of a company, its growth, and the cash flows it generates will depend on the investments made. Therefore, Capex is a highly relevant element in a company’s business. In addition, it provides us with information about whether the company is investing to continue growing or simply to maintain itself.
The investment in fixed assets by the company can be classified into two types, regarding the object of that investment:
- Maintenance Capex : It is known as the replacement investment. That is, the investment necessary to cover the impairment and amortization expense of fixed assets. So it could be understood as the necessary investment by the company to maintain the same current sales level.
- Expansion Capex : It is the investment necessary in fixed assets to increase the current level of sales. That is, what the company invests to acquire new fixed assets and / or improve the current one.
Therefore, the total investment in Capex by the company will be the sum of the previous two. With which, a company will carry out an expansion strategy when the total level of Capex is greater than the amortization expense. This means that you are investing not only to replenish assets, but also to increase or improve them.
Finding Capex in financial statements
The investment made by companies in Capex can be found directly in the statement of cash flows. More specifically in the cash flow of investment activities. However, there is a very simple formula to be able to calculate it using only the income statement and the balance sheet.
As mentioned above, the total Capex will be the sum of the maintenance and the expansion. In addition, we have assimilated the maintenance Capex to the company’s amortization expense. Therefore, the formula to calculate the Capex starts from this sum. Mathematically, its calculation is as follows:
Capex = Net Property, Plant and Equipment (year t) – Net Property, Plant and Equipment (year t-1) + Amortization (year t)
In other words, to calculate the Capex we follow the following steps:
- We take the company’s balance sheet for the current year and look at the Net Assets data.
- We subtract from the Current Net Assets the Net Assets from the balance of the previous year.
- To the result we add the amortization expense for this year that is found in the income statement.
Suppose a company that has published its balance sheet for the previous and current year, and its current income statement. And with this we want to see the investment in Capex made during this year.
|Summary Balance Sheet (figures in thousands of €)|
|Active||Year 0||Year 1||passive||Year 0||Year 1|
|Box||5||8||Short Term Fra Debt||150||200|
|Customers||300||500||Remun pending payment||75||23|
|Advances to staff||fifty||65||Creditors (non-tax)||32||58|
|Other current assets||fifty||2||Other liabilities operating circ||25||twenty|
|Total Current Assets||555||675||Total Current Liabilities||482||377|
|Financial Fixed Assets||325||0||Other long-term liability||fifteen||36|
|Net Fixed Assets||550||800||Long-term financial debt||225||69|
|Other Fixed Assets||42||107||Total Long-Term Liabilities||240||105|
|Total Non-Current Assets||917||907|
|TOTAL ASSETS||1,472||1,582||TOTAL LIABILITIES||1,472||1,582|
Being the income statement:
|Summary income statement|
|thousands of €||Year 1|
|Cost of Sales||(600)|
|Rdo Before Tax||1,000|
Following the formula described above and with the help of the financial statements of the company attached in the example, the result of the investment in Capex will be:
Capex = (800-550) + 65 = 315.
As we can see in this case, the company is carrying out an expansion policy, since Capex> Amortizations.