How to Calculate Capital Expenditure

Capital expenditures (CAPEX) refers to the money spent to acquire and maintain the physical assets of a company. These assets are most commonly referred to as plant, property and equipment (PPE) on the balance sheet. Manufacturing companies tend to have large CAPEX and usually spend more money on maintenance than service firms. For technology-rich companies, CAPEX might also refer to the cost of developing a product or system. Either way, it is a number the investment community uses to measure a firm's investment in future revenue-generating activities. A company with low CAPEX may have fewer expenses, but will it be able to compete with industry peers in the future?

Instructions

1. Obtain a copy of your firm's financial statements. Specifically, you want the balance sheet. The Form 10K is your best source for these statements, as well as additional notes the company may have regarding CAPEX outlays in the future.

2. Locate total assets. This is found at the end of the assets section on the balance sheet. You want the change in total assets from the previous year to the current year. Let's assume the change is $25,000 for this example.

3. Locate total liabilities. This number also can be found on the balance sheet just before stockholder's equity. You want the change in total liabilities from the previous year to the current year. Let's assume the change is $10,000 for this example.

4. Subtract the change in total liabilities from the change in total assets ($25,000-$10,000). The answer, $15,000, represents the amount spent on capital (capital expenditures) for the year.

5. Use the notes to financial statements to determine the difference between "maintenance" CAPEX and "growth" CAPEX. While it is difficult to find a hard calculation, capital expenditures that do not change from year to year can be assumed to be maintenance. When capital expenditures increase above this average, it is generally assumed to be growth CAPEX.

Tips & Warnings

• CAPEX also is used to calculate the present value of future cash flows using the discounted cash flow (DCF) model. See Resources for a link to a tutorial on this valuation model.

• Some firms, such as mining, might have different industry standards for calculating capital expenditures. If so, this will be explained in the notes to capital expenditures within the financial statements.

References

• Managerial Accounting by James Jiambalvo, Chapter 7: Capital Budgeting Decisions

Resources

• Read this Article in Spanish
• DCF Tutorial
• Calculation of Capital Expenditure on Sale, Transfer, Lease or Cession of Mining Property