What Is Capital Expenditure (CapEx)?
Capital expenditure is investment in assets a company will use for more than one year, such as buildings, machinery, vehicles, and data centers. Because the benefit stretches over many periods, the cost is recorded as an asset and expensed gradually through depreciation rather than hitting the income statement all at once.
CapEx shows up in the investing section of the cash flow statement, often labeled purchases of property, plant, and equipment. That placement matters: a company can report strong net income while spending heavily on CapEx that drains its cash.
Growth vs. Maintenance CapEx
Analysts split CapEx into maintenance spending, which keeps existing assets running, and growth spending, which expands capacity or enters new markets. A retailer replacing worn-out store fixtures is maintenance CapEx; opening fifty new stores is growth CapEx.
The distinction shapes how investors judge free cash flow, since maintenance CapEx is essentially mandatory while growth CapEx is a choice that should earn a return.
Example
A beverage company generates $80 million of operating cash flow and spends $30 million on a new bottling plant plus $10 million maintaining existing lines. Total CapEx is $40 million, so free cash flow is $80 million - $40 million = $40 million. The $40 million of CapEx becomes new PP&E on the balance sheet and will be depreciated over the assets' useful lives.
Why It Matters
CapEx is subtracted from operating cash flow to arrive at free cash flow, the core input to DCF valuation, so CapEx assumptions can swing a valuation dramatically. Capital intensity also varies by industry: semiconductor fabs and railroads require enormous CapEx, while software firms need very little.
In modeling tests and interviews, knowing that CapEx flows through the cash flow statement first and reaches the income statement only later via depreciation is a frequent checkpoint.
