How to Calculate CapEx can be an interview question among a pile of technical questions. It’s not a tricky question or contains too many meanings behind for analysis. Yet, it is a component to arrive at the value of many other multiples and metrics in finance.
1. Definition of CapEx
Definition; CapEx is short for Capital Expenditures. It is an amount of money invested by a company to acquire new fixed assets, and upgrade, build, and improve the firm’s fixed assets. Fixed assets which need to be improved usually are buildings, warehouses, properties, factories, and etc. CapEx is a big component in the firm’s cash flow statement and other finance formulas such as Free Cash Flow.
For Accounting, the capital expenditures are considered a firm’s investment to expand and grow in future. It is not seen as expenses incurred during the year to be recorded.
CAPEX are major purchases of fixed assets or significant amounts of money spent in upgrading /maintaining/repairing fixed assets for a firm’s future growth. These expenses are capitalized to increase the value of fixed assets. That explains why CAPEX are recorded in the line item Fixed Assets.
The amount of CAPEX also appears in the statement of cash flow under the section Cash Flow From Investing Activities.
OPEX is also called Operating Expenses. It refers to costs incurred day-by-day for a firm’s operation. Some of OPEX are salaries, rents, utilities, and any expenses under Selling Expenses and Administration Expenses. A firm presents these expenses in their Income statement.
Unlike OPEX, CAPEX capitalized in assets resembles investment that lasts a number of years, usually 5-10 years for fixed assets, or perhap up to 20 – 50 years for certain assets such as buildings. CAPEX will be allocated over time depending on the useful life of an asset. These costs are amounts of depreciation appearing in the income statement.
Since OPEX happen day by day and are recorded at a time it incurs, these costs can be deducted from their tax calculation.
The easiest way to define which is CAPEX is you can look at the capacity of fixed assets. If the expense is used to acquire a new fixed asset, or improve the capacity of an existing asset, it is CAPEX.
If the expense doesn’t help in increasing the value and the capacity of a fixed asset, it is operating expenses incurred for the firm’s ordinary operation.
3. How to Calculate CapEx
CapEx can be derived from the balance sheet (in which, we take the opening and closing balance of PP&E – Plant, Property and Equipment) and the income statement (in which, we have the value of depreciation charged during the year).
CAPEX = PP&E (current period) – PP&E (previous period) + DEPRECIATION
Or you don’t need to look at the income statement, you can calculate the depreciation charged in the year by taking the residue of two different-period accumulated depreciations.
We have the formula:
CAPEX = PP&E (current period) – PP&E (previous period) + Accumulated Depreciation (previous year) – Accumulated Depreciation (current period)
The formula one is only possible if the Income statement has depreciation expense broken down separately. If there isn’t any line item named Depreciation, you can apply the formula two since the line item Accumulated Depreciation is presented clearly on the balance sheet. The residue of Accumulated Depreciation of the current period and previous period is Depreciation Expense during the year.
4. Steps to Calculate CapEx
There are two ways so that you could have the value of CapEx.
- From the statement of cash flow:
If the cash flow statement is disclosed to you, you can take the value of CapEx below the section of Cash Flow from Investing Activities. CapEx can be under various names including New Acquisitions. New Purchase of Assets, Investments in assets,
- From the income statement and balance sheet:
Keep in mind that several firms don’t present depreciation expenses in their income statements. In this case, if you have access to the entire financial statements with notes and words, you can take the value of depreciation typed somewhere in the income statements.If you don’t, the only way to produce the value of CapEx is using the Formula 1 – From the balance sheet.
Let’s assume you have sufficient data from the Income Statement and the Balance sheet, you can follow these steps to calculate CapEx:
From the firm’s balance sheet:
Determine the value of PP&E of the current period – at the end of the current period.
Take the value of PP&E of previous period – at the end of previous year/ at the beginning of the current period.
From the firm’s income statement:
Take the value of Depreciation Expense during the year.
Determine the difference of the value of PP&E between the two different periods. The value of PP&E (current period) minus that of the previous period is the value that you need.
Apply the formula to calculate Capital Expenditures spent during the year: The difference derived in step 4 plus the depreciation incurred during the year is the value of CapEx.
5. What does CapEx imply?
CapEx is used to help with various problems in supporting the financial planning and evaluating the firm’s financial health to a certain extent.
From capital expenditures, you know how much money the firm spends in acquiring new assets or revamping existing fixed assets. It allows analysts to evaluate whether or not these investments (CapEX) generate relative profits for the firm.
The analysis gives the firm’s planner a clear picture of their investments and the profitability the investments bring to. Thus, from these analysis,
For Strategy: or outside stakeholders, CapEx gives them a picture of a firm’s investments to see if the firm is investing money to expand and grow in future. From then, they gauge the firm’s potential in a certain aspect.