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Capital expenditures are cash spent on long-term assets like buildings, equipment or technology. These investments support future growth but reduce cash in the period when they are made.
How it relates
Operating Cash FlowOperating cash flow is the cash the business generates from its normal day-to-day operations before investing and financing. It shows how much cash is coming in from customers after paying suppliers and operating costs.−Capital Expenditures=Free Cash FlowFree cash flow is the cash a company has left after paying its everyday costs and the investments needed to keep the business running. It is the money that can be used to pay down debt, pay dividends, buy back shares or invest in new projects.
Capital Expenditures+Net Intangibles (CF)Net intangibles in the cash flow statement usually capture cash spent on or received from intangible assets such as patents, licences or software. Large negative values mean the company is investing in these assets.+Net AcquisitionsNet acquisitions show cash spent on buying other companies minus cash received from selling businesses. Big negative numbers mean the company has been acquiring; positive values can mean it has sold or spun off businesses.+Purchase of InvestmentsPurchase of investments is the cash spent on financial investments such as bonds, shares or other securities. It reduces cash today in the hope of earning returns in the future.−Sale of InvestmentsSale of investments is the cash received from selling financial investments. It increases cash but may also mean the company is realising gains, reducing risk or freeing up funds.+Other Investing ActivityOther investing activity groups the remaining investing cash flows that do not fit into the main categories. It can include things like loans to others or cash received from those loans being repaid.=Net Investing Cash FlowNet investing cash flow is the total cash used for or generated by investments in assets and financial instruments. It is often negative for growing companies because they are spending cash to expand.
Where it fits
Capital Expenditures→Capital Allocation
Capital Expenditures÷RevenueRevenue is the total amount of money the company earned from selling its products or services. It is the top-line number that reflects the overall size of the company's business.→Capital IntensityCapital intensity measures how much capital investment a company requires relative to its revenue, indicating the level of fixed assets needed to operate the business.
Capital expenditures are cash spent on long-term assets like buildings, equipment or technology. These investments support future growth but reduce cash in the period when they are made.
Types of capital expenditure:
- Maintenance capex: Spending to maintain existing operations and replace worn assets
- Growth capex: Investments to expand capacity, enter new markets, or develop new products
- Regulatory capex: Required spending for compliance with regulations
Why capital expenditure matters:
- Future earnings: Today's capex creates tomorrow's revenue capacity
- Competitive position: Underinvestment can erode market position over time
- Cash flow impact: Reduces free cash flow available for dividends and debt repayment
- Return on investment: Capex should generate returns exceeding the cost of capital
Key analysis points:
- Capex to depreciation ratio: Ratio above 1 indicates expansion; below 1 may signal underinvestment
- Capex to revenue: Measures capital intensity of the business
- Capex trends: Declining capex may boost near-term cash flow but hurt long-term growth
Compare management's stated growth plans to actual capex spending. Persistent gaps may indicate strategic challenges or capital constraints.