Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Growth Capex====== Growth Capex (short for Growth Capital Expenditures) is the money a company invests to expand its operations and generate //future// revenue and profits. Think of it as the spending that makes the business bigger and better over time. It's the opposite of its more modest sibling, [[Maintenance Capex]], which is the cost of simply keeping the lights on and maintaining the current level of operations. For a pizza company, buying a new, more efficient oven to replace an old one is maintenance. Buying the building next door to open a second location is growth. This spending is a crucial choice by a company's management: it's a decision to reinvest a portion of today's earnings in the hope of creating a much larger stream of earnings tomorrow. For investors, understanding a company's growth capex is like getting a peek into its ambitions and its strategy for the future. ===== Why Growth Capex Matters to Value Investors ===== For a [[Value Investing]] practitioner, analyzing a company’s spending on growth is not just an accounting exercise; it’s a deep dive into the quality of the business and its management. A company can be statistically cheap, but if its management consistently pours money into projects that don't earn a good return, that "value" will quickly evaporate. Wise spending on growth creates a powerful compounding effect, widening a company's [[Economic Moat]] and increasing its intrinsic value over time. Conversely, foolish spending—what legendary investor [[Peter Lynch]] called "diworsification"—can destroy shareholder wealth faster than a fire in a paper factory. By scrutinizing how much a company spends on growth and, more importantly, what it gets in return, an investor can distinguish a brilliant capital allocator from a reckless empire-builder. ==== The Good, The Bad, and The Ugly ==== Not all growth spending is created equal. The key is to assess the profitability of these investments. === The Good === This is when a company invests in high-return projects. For example, it spends $10 million on a new production line that generates an extra $2 million in profit each year. This represents a fantastic 20% [[Return on Invested Capital (ROIC)]]. This kind of intelligent investment is the hallmark of a wonderful business that can grow its value for years to come. === The Bad === This occurs when a company spends heavily on growth but earns a poor return. Imagine a retailer spending billions to expand into a new country, only to find the market is too competitive and it never turns a profit. The company gets bigger, but shareholders get poorer. This is often driven by a management team focused on size rather than profitability. === The Ugly === This is where accounting can get deceptive. Some companies might try to make their performance look better by misclassifying necessary maintenance spending as "growth" spending. Why? Because the formula for [[Free Cash Flow (FCF)]] often subtracts only maintenance capex. By understating maintenance costs, a company can artificially inflate its FCF, fooling investors into thinking the business is more cash-generative than it really is. This is a significant red flag. ===== Finding Growth Capex on the Financial Statements ===== Companies rarely break out growth and maintenance capex in their financial reports. Therefore, investors have to become detectives and estimate it themselves. While there are several complex methods, a widely used and practical starting point is to look at the [[Cash Flow Statement]]. Here is a simplified, two-step approach: - 1. Find the company's total [[Capital Expenditures (Capex)]]. This is usually listed as a single line item in the "Cash Flow from Investing Activities" section. - 2. Find the company's [[Depreciation and Amortization (D&A)]] expense, which is found in the "Cash Flow from Operating Activities" section. D&A is a non-cash charge that represents the "using up" of a company's past assets. It serves as a reasonable (though imperfect) proxy for maintenance capex. The basic formula is: **Growth Capex ≈ Total Capex - D&A** //A word of caution//: This is an approximation. Inflation can mean that replacing an old asset costs much more than its original depreciation value. Also, for a fast-growing company, the true maintenance level will be higher than for a static one. This formula is your first step in the investigation, not the final answer. ===== The Capipedia.com Takeaway ===== Growth Capex represents the seeds a company plants for its future. As an investor, your job isn't to applaud the act of planting but to assess the fertility of the soil. A company's track record of generating high returns on these investments is one of the most powerful indicators of a superior business and skilled management. Always ask: is this spending creating real, durable value for shareholders, or is it just making the empire bigger? The answer separates the true long-term compounders from the businesses that are simply running to stand still.