CAPEX: Definition, Calculation and Business Challenges
- Iter Advisors
Contents
CAPEX (or Capital Expenditures) represents investments made by a company to acquire, modernize or maintain assets intended for long-term use.
These investments are essential to maintain a competitive business and ensure sustainable growth. They generally involve the purchase ofequipment, the construction ofinfrastructures, or the development of software or proprietary solutions.
Unlike OPEX(Operational Expenditures), which covers costs related to day-to-day operations, CAPEX is distinguished by its impact over several accounting years. It is a key element in a company's financial strategy, directly influencing its capacity for innovation andexpansion.
Optimal CAPEX management helps improve productivity and profitability, while poorly anticipated investment can undermine financial flexibility and put a strain on cash flow.
What is CAPEX? Definition and basic principles
CAPEX definition and role in the company
CAPEX, or capital expenditure, corresponds to the financial resources allocated by a company to acquire or improve assets that will generate value over the long term. These investments are considered as fixed assets, i.e. they appear on the assets side of the balance sheet and are depreciated over several years.
The main aim of CAPEX is to support a company's growth by increasing its production capacity, modernizing its infrastructure, or developing new products and services. It also plays a fundamental role in a company's long-term viability, enabling it to remain competitive in the face of market trends and technological innovations.
Case in point: an industrial company wishing to optimize its production costs can invest in an automated production line, thereby reducing human error and increasing overall productivity.
What types of CAPEX are there?
CAPEX falls into several categories, depending on a company's investment objectives and strategies. Each type of CAPEX responds to a specific need, whether to maintain existing infrastructures orincrease production capacity.
Maintenance CAPEX
Maintenance CAPEX covers the investments needed to keep existing assets in good condition and extend their service life. The aim is not to develop new capacities, but to avoid obsolescence and costly breakdowns.
Examples:
- Replacing defective equipment in a plant
- Software upgrade to meet new safety standards
- Repairing a production line to avoid downtime
Case study: A transport company is investing in the modernization of its fleet of vehicles, gradually replacing older models with more energy-efficient versions.
Expansion CAPEX
Expansion CAPEX concerns investments designed to increase production, expand the service offering or develop new activities. This type of CAPEX is strategic, as it aims to generate new revenues and strengthen the company's position in its market.
Examples:
- Construction of a new plant to meet growing demand
- Development of proprietary software to automate internal processes
- Acquisition of new machines to speed up production
Case study: An e-commerce company invests in a network of automated warehouses to improve inventory management and reduce delivery times.
How to calculate CAPEX? Formula and method
CAPEX definition and role in the company
CAPEX, or capital expenditure, corresponds to the financial resources allocated by a company to acquire or improve assets that will generate value over the long term. These investments are considered as fixed assets, i.e. they appear on the assets side of the balance sheet and are depreciated over several years.
The main aim of CAPEX is to support a company's growth by increasing its production capacity, modernizing its infrastructure, or developing new products and services. It also plays a fundamental role in a company's long-term viability, enabling it to remain competitive in the face of market trends and technological innovations.
Case in point: an industrial company wishing to optimize its production costs can invest in an automated production line, thereby reducing human error and increasing overall productivity.
What types of CAPEX are there?
CAPEX falls into several categories, depending on a company's investment objectives and strategies. Each type of CAPEX responds to a specific need, whether to maintain existing infrastructures orincrease production capacity.
Maintenance CAPEX
Maintenance CAPEX covers the investments needed to keep existing assets in good condition and extend their service life. The aim is not to develop new capacities, but to avoid obsolescence and costly breakdowns.
Examples:
- Replacing defective equipment in a plant
- Software upgrade to meet new safety standards
- Repairing a production line to avoid downtime
Case study: A transport company is investing in the modernization of its fleet of vehicles, gradually replacing older models with more energy-efficient versions.
Expansion CAPEX
Expansion CAPEX concerns investments designed to increase production, expand the service offering or develop new activities. This type of CAPEX is strategic, as it aims to generate new revenues and strengthen the company's position in its market.
Examples:
- Construction of a new plant to meet growing demand
- Development of proprietary software to automate internal processes
- Acquisition of new machines to speed up production
Case study: An e-commerce company invests in a network of automated warehouses to improve inventory management and reduce delivery times.
What is the CAPEX formula?
CAPEX can be calculated using the following formula:
CAPEX = change in tangible/intangible fixed assets + depreciation
Explanation of elements :
- Change in tangible/intangible fixed assets: difference between the value of assets at the beginning and end of the accounting period.
- Depreciation : Gradual reduction in asset value due to wear and tear and obsolescence.
Example: A company with property, plant and equipment of 2 million euros at the beginning of the year and 2.5 million at the end, with depreciation of 300,000 euros, will have CAPEX of 800,000 euros(500,000 change + 300,000 depreciation).
Another example of CAPEX calculation
A technology company wants to modernize its IT infrastructure. It invests €500,000 in new servers and software. At the end of the year, after depreciation, the book value of these assets is €400, 000.
CAPEX calculation :
- Initial investment: €500,000
- Depreciation: €100,000
- CAPEX = 500,000 - (400,000 - 100,000) = €200,000
Why is CAPEX monitoring so important for a company?
What are the advantages of a well-controlled CAPEX?
Optimized CAPEX brings a number of strategic and financial benefits:
- Increased productivity: Modern equipment enables us to produce more and better.
- Business continuity: A well-maintained infrastructure prevents unforeseen costs and costly breakdowns.
- Lower operating costs: Investing in more efficient equipment reduces energy and maintenance costs.
- Increased competitiveness: A company that regularly invests in innovation is better positioned to compete.
Example: An industrial company replaces its energy-hungry machines with more energy-efficient equipment, thereby reducing its electricity bill and its environmental impact.
What are the CAPEX risks?
Poorly managed CAPEX can have negative consequences:
- Cash flow overload, making it difficult to finance current expenses.
- Overinvestment in obsolete assets, reducing their profitability.
- Excessive debt, complicating long-term financial management.
Case in point: A company that invests heavily in technological equipment without studying its obsolescence risks having to replace it prematurely, thereby increasing its unforeseen costs.
How to finance CAPEX? Solutions and strategies
What are the advantages of a well-controlled CAPEX?
Optimized CAPEX brings a number of strategic and financial benefits:
- Increased productivity: Modern equipment enables us to produce more and better.
- Business continuity: A well-maintained infrastructure prevents unforeseen costs and costly breakdowns.
- Lower operating costs: Investing in more efficient equipment reduces energy and maintenance costs.
- Increased competitiveness: A company that regularly invests in innovation is better positioned to compete.
Example: An industrial company replaces its energy-hungry machines with more energy-efficient equipment, thereby reducing its electricity bill and its environmental impact.
What are the CAPEX risks?
Poorly managed CAPEX can have negative consequences:
- Cash flow overload, making it difficult to finance current expenses.
- Overinvestment in obsolete assets, reducing their profitability.
- Excessive debt, complicating long-term financial management.
Case in point: A company that invests heavily in technological equipment without studying its obsolescence risks having to replace it prematurely, thereby increasing its unforeseen costs.
Equity vs. debt financing
CAPEX can be financed from two main sources:
- Equity capital, derived from reinvested earnings or fund-raising.
- Debt, via bank loans, leasing or bonds.
Example: a technology start-up finances its CAPEX by raising funds from investors, while an SME opts for a bank loan to renew its machinery.
The impact of CAPEX on cash flow and profitability
CAPEX investment must be balanced to avoid weakening cash flow. Too much investment can limit liquidity, while too little CAPEX can slow company growth.
Graph: Comparison of cash flow before and after a CAPEX investment.
Conclusion
CAPEX is an essential lever for business growth, but it must be managed rigorously to avoid financial risks. A good balance between investment and cash management is crucial to sustainable profitability.