Capital expenditures (CAPEX)

Definition

Capex is short for capital expenditure. Capex is the investment that a company makes into any long-term assets that will facilitate its growth. Capex is generally a significant outflow of funds for most companies and it can have a major impact on the free cash flows.

Example

Capex = Current Property Plant and Equipment (PP&E) – Prior Period PP&E + DepreciationSuppose a SaaS company bought new computers and expanded its office space to boost revenues.Example:PP&E at the start of the year: $30,000PP&E at the end of the year: $40,000Depreciation: $10,000Capex = 40,000 - 30,000 + 10,000 = $20,000

Why it matters

A company's CapEx strategy indicates the amount of investment it's making in new and existing fixed assets to achieve revenue growth. It also shows how confident the company's leaders are in predicting future demand.A strategically sound CapEx strategy can boost income and profitability in the long run.It also offers insight into the effectiveness of the company's finance team, and whether they're able to make the best use of available funds and can drive return on investment.

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