======Capital Expenditure======
Capital Expenditure (often shortened to '[[CapEx]]') represents the money a company spends to acquire, upgrade, and maintain its long-term physical assets. Think of it as the company's investment in its own foundation for future growth. These aren't the day-to-day costs of running the business, like salaries or utility bills (those are //operating expenses//). Instead, CapEx includes significant purchases like new factories, machinery, vehicles, or a major technology overhaul. For a value investor, understanding CapEx is like looking under the hood of a car before you buy it. It reveals how much the company needs to reinvest just to stay in the game, how much it's betting on future expansion, and ultimately, how much real cash is left over for its owners—the shareholders. It’s a crucial piece of the puzzle for determining a company's long-term health and efficiency.
===== Why CapEx Matters to an Investor =====
Think of a company as a money-making machine. CapEx is the cost of buying, fixing, and upgrading that machine. If the machine requires constant, expensive upgrades just to keep running, there might not be much profit left for you, the owner. Conversely, if the company is wisely investing in a bigger, better machine that will churn out more profit for years to come, that's a story you want to be a part of. CapEx tells you which story is unfolding.
==== CapEx as a Sign of Growth vs. Maintenance ====
Not all CapEx is created equal. The savviest investors learn to mentally split it into two categories:
  * **Maintenance CapEx:** This is the cost of staying in business. It's the money spent to replace worn-out equipment and maintain the current level of operations. Think of it as fixing the leaky roof. It’s necessary, but it doesn't grow the business. A company with very high maintenance CapEx can feel like it's running on a treadmill—spending a lot just to stay in the same place.
  * **Growth CapEx:** This is the exciting part. It's the investment in new assets to expand the business, increase efficiency, or enter new markets. This is the company building a new, more profitable wing on its factory. This is the spending that fuels future earnings growth.
Disentangling these two can be tricky, as companies don't report them separately. A common shortcut, famously used by [[Warren Buffett]], is to use the company's annual [[depreciation]] charge as a rough proxy for maintenance CapEx. If total CapEx is significantly higher than depreciation year after year, it’s a strong hint that the company is investing for growth.
==== Finding CapEx on the Financial Statements ====
You don't need a secret decoder ring to find this number. Companies report CapEx on the [[Cash Flow Statement]], which is designed to show you exactly where a company's cash is coming from and going to. You'll typically find it in the "Cash Flow from Investing Activities" section, often labeled "Purchase of [[Property, Plant, and Equipment (PP&E)]]" or something similar. While the spending itself is reported here, its effect ripples across the other financial statements. The new assets increase the PP&E line on the [[Balance Sheet]], and their cost is gradually expensed over their useful life through depreciation on the [[Income Statement]].
===== The Value Investor's Perspective on CapEx =====
For value investors, cash is king. CapEx is a primary driver of how much cash a business truly generates.
=== CapEx and Free Cash Flow ===
This is the main event. CapEx is the key ingredient in calculating one of the most important metrics in all of investing: [[Free Cash Flow (FCF)]]. The basic formula is:
**Free Cash Flow = [[Cash Flow from Operations]] - Capital Expenditure**
FCF is the pool of cash left over after a company has paid its operating expenses and funded its capital expenditures. This is the "free" cash that management can use to benefit shareholders, for instance by:
  * Paying [[dividends]].
  * Buying back its own stock ([[share buybacks]]).
  * Paying down debt.
  * Making acquisitions.
A business that generates lots of FCF is a value investor's dream. A business whose CapEx eats up all its operating cash flow is often a nightmare, as it has little to no money left to reward its owners.
=== Analyzing CapEx Trends ===
Never look at a single year of CapEx in isolation. Instead, look for trends and ask questions:
  * **Consistency:** Is CapEx stable, lumpy, or growing? A manufacturer might have large, lumpy expenditures every few years when it builds a new plant. A retailer might have more consistent spending as it opens new stores.
  * **Comparison to Depreciation:** As mentioned, is CapEx consistently running higher or lower than depreciation? This provides clues about whether the company is growing or potentially shrinking its asset base.
  * **Return on Investment:** Is the spending paying off? If a company's CapEx is rising, you should expect to see its revenue and profits rise in the following years. If they don't, management might be making poor investment decisions.
=== Industry Matters ===
You can’t compare the CapEx of a software company to that of an airline. Capital-intensive industries like manufacturing, telecommunications, and utilities require enormous, ongoing CapEx just to stay competitive. In contrast, asset-light businesses like consulting firms or software-as-a-service (SaaS) companies have very low CapEx needs.
The key is **context**. Always compare a company's CapEx (as a percentage of sales, for example) to its direct competitors. This will tell you if the company is more or less capital-efficient than its peers, which is a powerful insight into its competitive advantage and long-term investment potential.