How to Calculate CapEx

Capital expenditure (CapEx) is the money a company spends on fixed assets, which fall under property, plant and equipment (PP&E). This money is spent either to replace PP&E that has used up its useful life or may include investments that are meant to expand the business.

CapEx only includes expenditures that are for purchases that have a useful life of more than one year. If a company incurs an expense on an asset that is not useful for at least a year, it is considered part of operating expense and written off.

Unlike operating expenses, capital expenditures are not eligible for deduction from taxes directly. However, they may be depreciated over several years, depending on the asset's useful life. This depreciation is allowed as an expense while determining the company's tax liability, which reduces the taxable income.

In some cases, CapEx used to maintain the current usefulness of a fixed asset is deducted entirely from the taxes the year that the expense is incurred.

A company's CapEx can be found on its cash flow statement under the investing activities section. It may be labeled capital spending, acquisition expense, or purchases of property, plant and equipment. It is also important to note that despite being an expense, it does not show up in the income statement. It also is absent from a company's balance sheet. That being said, the balance sheet and income statement together can be used to calculate it.

Different industries operate with different levels of capital expenditure. It is not very helpful to compare the capital expenditure of companies within different industries. The primary reason for this is that different industries require different levels of annual capital expenditure.

Companies with traditionally high capital expenditure include transportation, energy, automobile manufacturing, and semiconductor companies. Physical capital per worker may be a useful metric for measuring how capital intensive certain industries are.

The final point to note is that capital expenditures are hardly held constant and often fluctuate year to year in any industry.