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| capital_expenditure_capex [2025/07/29 22:59] – created xiaoer | capital_expenditure_capex [2025/07/31 20:11] (current) – xiaoer |
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| ======Capital Expenditure (CapEx)====== | ====== Capital Expenditure (CapEx) ====== |
| Capital Expenditure (CapEx) is the money a company uses to buy, upgrade, and maintain its physical [[Assets]], such as buildings, vehicles, equipment, or land. Think of it as the company's investment in its long-term future. If a pizza chain buys a new oven or an automaker builds a new factory, that's CapEx. These are not the everyday costs of running the business, like paying for flour or electricity (those are [[Operating Expenses]]). Instead, CapEx represents major purchases that are expected to generate value for many years. For a value investor, understanding CapEx is like looking under the hood of a car. It reveals how much a company must reinvest just to stay in business and, more importantly, how much it's spending to grow. A company that consistently spends its cash on smart, high-return projects is a potential gem, while one that pours money into a leaky bucket is a red flag. | Capital Expenditure (often shortened to CapEx) represents the money a company spends to acquire, upgrade, and maintain its physical assets. Think of it as the company's investment in its own foundation—the factories, machinery, vehicles, and buildings that it needs to operate and grow. These aren't your everyday expenses; CapEx purchases are significant, long-term investments expected to provide benefits for more than one year. This is the crucial difference between CapEx and [[Operating Expenses (OpEx)]], which are the day-to-day costs of running the business, like salaries, rent, and utilities. While OpEx is like paying the electricity bill to keep the lights on today, CapEx is like buying a whole new, more efficient power generator for the factory. For an investor, tracking CapEx is like being a detective; it reveals clues about a company's health, strategy, and future ambitions. You'll find this critical figure on the company's [[Cash Flow Statement]]. |
| ===== Why CapEx Matters to Value Investors ===== | ===== The Story CapEx Tells a Value Investor ===== |
| For value investors, CapEx isn't just a line item; it's a story about a company's strategy and future prospects. Analyzing it helps you understand the true cost of doing business and the real profitability of a company. A business that requires enormous, constant infusions of capital just to tread water is far less attractive than one that can grow with minimal investment. | For a [[Value Investing]] enthusiast, CapEx is more than just a number on a spreadsheet; it's a narrative about the company's management and competitive position. A company's approach to spending on its assets can tell you a lot about its future. |
| ==== The Two Faces of CapEx: Maintenance vs. Growth ==== | Is the company spending a fortune just to keep the lights on, or is it investing wisely to build a bigger, more profitable empire? A business that must constantly pour cash back into heavy machinery just to stay competitive (think airlines or some manufacturing firms) is known as a **capital-intensive** business. These companies can be tricky investments because a large chunk of their profits gets eaten up by the need to replace aging assets. |
| This is one of the most powerful distinctions an investor can make. While financial statements don't separate them for you, thinking in these terms is crucial. | On the other hand, a company that requires very little CapEx to grow can be a goldmine. These **capital-light** businesses (think software companies or consulting firms) can generate heaps of cash without needing to reinvest much of it. This leaves more money for shareholders in the form of dividends or buybacks. The key is to look //beyond// the raw number and understand the //why// behind the spending. |
| * **Maintenance CapEx:** This is the non-negotiable spending required to keep the business running as is. It's the cost of replacing old trucks, repairing worn-out machinery, or updating essential software. It doesn't grow the business; it just keeps the lights on. A company with high [[Maintenance CapEx]] has to run hard just to stay in the same place. | ===== Finding and Understanding CapEx ===== |
| * **Growth CapEx:** This is the exciting part. It's the discretionary spending on projects that will increase the company's earning power. Examples include building a new factory to expand capacity, buying a smaller competitor, or investing in new technology to create a better product. This is where a company's management team shows its skill in allocating capital wisely. | ==== Where to Look ==== |
| The goal is to find companies that spend a high proportion of their CapEx on genuine growth projects that earn a high [[Return on Invested Capital (ROIC)]]. | The most direct place to find CapEx is in the "Cash Flow from Investing Activities" section of the company's annual or quarterly [[Cash Flow Statement]]. It's often listed as "Purchase of property, plant, and equipment" or a similar line item. |
| ==== CapEx and Free Cash Flow: The Holy Grail ==== | If you're feeling adventurous, you can also calculate it yourself using information from the [[Income Statement]] and the [[Balance Sheet]]. The formula is: |
| CapEx is the critical ingredient in calculating one of the most important metrics in value investing: [[Free Cash Flow (FCF)]]. The basic formula is beautifully simple: | * **CapEx** = Net [[Property, Plant, and Equipment (PP&E)]] (from the current period) - Net PP&E (from the prior period) + [[Depreciation]] expense (from the current period's Income Statement) |
| **FCF = Cash from Operations - Capital Expenditures** | This formula essentially reconstructs the spending by looking at the change in the value of the company's assets and adding back the non-cash charge of depreciation. |
| FCF is the cash left over after a company has paid for everything it needs to operate and maintain its asset base. This is the real cash available to reward shareholders through dividends and share buybacks, or to pay down debt and make acquisitions. The legendary investor [[Warren Buffett]] has a similar concept called [[Owner Earnings]], which essentially refines FCF by focusing on maintenance CapEx to determine the true cash-generating power of a business. | ==== Maintenance CapEx vs. Growth CapEx ==== |
| ===== Finding CapEx in Financial Statements ===== | This is a powerful concept championed by legendary investor [[Warren Buffett]]. While companies lump all CapEx together, a savvy investor learns to distinguish between two types: |
| You don't need a magnifying glass, but you do need to know where to look. | - **Maintenance CapEx:** This is the non-negotiable spending required to maintain the company's current level of operations. It’s the cost of replacing worn-out trucks or repairing the factory roof. It doesn’t expand the business; it just keeps it from shrinking. This is a //true// cost, and it reduces the cash available to owners. |
| - **The Cash Flow Statement:** This is your primary source. In the "Cash Flows from Investing Activities" section, you will almost always find a line item like "Purchases of [[Property, Plant, and Equipment (PP&E)]]". This is your CapEx figure for the period. | - **Growth CapEx:** This is the exciting, discretionary spending used to expand the business and increase its future earning power. It’s the cost of building a new factory, buying a smaller competitor, or investing in technology to serve more customers. This is an //investment//, not just a cost. |
| - **The Balance Sheet and Income Statement:** You can also get a rough estimate of CapEx by combining information from the [[Balance Sheet]] and the [[Income Statement]]. The formula is: | Why does this matter? Because the true, sustainable cash profit of a business—its [[Free Cash Flow (FCF)]]—should only have Maintenance CapEx subtracted from it. Unfortunately, companies don't split these figures for you. Astute investors often develop their own methods to estimate Maintenance CapEx to get a more accurate picture of a company's profitability. |
| //CapEx ≈ Change in Gross PP&E from last year to this year// | ===== CapEx in Action: A Practical Checklist ===== |
| Or, if the company only reports Net PP&E: | When analyzing a company, don't just glance at the CapEx figure. Dig deeper with this simple checklist. |
| //CapEx ≈ Change in Net PP&E + [[Depreciation]] for the period// | * **Compare CapEx to Depreciation.** Is CapEx consistently higher than [[Depreciation]]? This could be a sign of a growing business. If CapEx is consistently //lower// than depreciation, be cautious. The company might be "milking" its assets by not reinvesting enough to maintain them, which could lead to problems down the road. |
| This back-of-the-envelope calculation is a great way to double-check the figures and understand how the financial statements connect. | * **Look at CapEx as a Percentage of Sales.** Calculating CapEx / Revenue allows you to compare the capital intensity of different companies within the same industry. A company that can generate the same sales with less CapEx often has a superior business model or a competitive advantage. |
| ===== The Capipedia.com Take ===== | * **Analyze the Return on Investment.** If a company is spending heavily on Growth CapEx, you should ask: is it working? A great way to check is by looking at its [[Return on Invested Capital (ROIC)]]. If a company pours money into new projects but its ROIC stays flat or declines, that's a major red flag. It's like watering a plastic plant—a total waste of resources. |
| Don't just look at the number; understand the narrative behind it. High CapEx can be fantastic if it's fueling profitable growth, and disastrous if it's just keeping a sinking ship afloat. | * **Understand the Industry Context.** Context is everything. An oil and gas company will naturally have astronomically higher CapEx than a social media company. Comparing CapEx across different sectors is meaningless. Always benchmark a company's spending against its direct competitors to understand who is investing more efficiently. |
| When analyzing a company's CapEx, keep these key points in mind: | |
| * **Judge the Quality, Not the Quantity:** A company spending $1 billion on projects that earn a 20% return is creating immense value. A company spending the same amount on projects that earn a 2% return is destroying it. Always ask: What is the return on this investment? | |
| * **Seek Capital-Light Champions:** The most wonderful businesses are often those that can grow sales and profits without needing to spend much on CapEx. Software, media, and brand-focused companies often fall into this category. They are true cash-generating machines. | |
| * **Compare CapEx to Depreciation:** If CapEx is consistently much higher than depreciation, the company is likely in a growth phase (good!) or its industry requires massive, ongoing investment to stay competitive (potentially bad!). If CapEx is consistently lower than depreciation, the company might be dangerously neglecting its assets, which could lead to problems down the road. | |
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