Capital expenditure
Also called: capex, capital spending
Money spent on long-lived assets such as factories, machines or software, recorded as an asset and then depreciated or amortised.
Capital expenditure does not reduce profit when it is spent; it reaches the income statement gradually through depreciation. It does reduce cash immediately, and appears in the investing section of the cash flow statement.
Treating ordinary running costs as capital expenditure makes profit look higher than it is.
Example
A company that buys a ₹50 lakh machine records capex of ₹50 lakh this year, but only ₹4.5 lakh of depreciation in its income statement.
Learn more in these lessons
- Depreciation, amortisation and capital expenditureWhat are depreciation and amortisation?
- The cash flow statementHow do you read a cash flow statement?
- Cyclical and capital-intensive businessesWhy do profits in cyclical industries swing so much, and how should you judge them?
- Free cash flow and cash conversionWhat is free cash flow, and why do investors care about it?
- EV/EBITDAWhat does EV/EBITDA tell you, and when does it work best?
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