Capital Expenditure (CapEx)

Published Jan 25, 2023

Definition of Capital Expenditure

Capital Expenditure (or CapEx for short) is an expenditure that is made to acquire or upgrade physical assets such as property, buildings, or equipment. That means it is an investment in the long-term assets of a company and is usually made with the expectation of generating future returns.

Example

To illustrate this, let’s look at a small manufacturing company. The company has been operating for several years and is now looking to expand its production capacity. To do so, it needs to invest in new machinery and equipment. That means the company has to make a capital expenditure to purchase the new equipment. This investment is expected to generate future returns in the form of increased production capacity and efficiency.

Note that investments in physical capital with a useful life of less than a year are not considered capital expenditures because these assets are considered expenses (i.e., they are not capitalized on the balance sheet).

Why Capital Expenditure Matters

Capital expenditure is an important part of any business. It is necessary for companies to invest in new assets in order to stay competitive and grow. That means companies need to make sure that their capital expenditure is well-planned and well-executed. Otherwise, they may end up wasting money on assets that don’t generate the expected returns. Thus, it is important for companies to carefully evaluate their capital expenditure decisions and make sure that they are investing in the right assets.