Capital expenditure (Capex)

Capital expenditure

Capital expenditure (capex) spending is a vital indicator of a company’s growth potential and financial health. Thus investors and analysts pay close attention to it. While a business that significantly reduces or cuts its capex spending may be seen as facing difficulties or being more cautious in its expansion plans, one that invests heavily in capex may be seen as having a positive outlook for future growth. Capex, which refers to investments in long-term assets intended to support a company’s long-term growth and profitability, is crucial in corporate finance and accounting. 

What is capex? 

Investments made by a business in long-term assets essential to its operations are referred to as capex. Infrastructural elements such as structures, machinery, equipment, and other tools might be considered among these assets. Contrary to operating expenses, which are one-time payments necessary to keep a firm afloat, capex is a one-time payment made to increase the overall productivity and efficiency of the business.  

Capex is a crucial component of a business’s financial planning process, and to make sure that the investments align with the organisation’s long-term objectives, it requires thorough analysis and budgeting. Companies can improve their competitive advantage, grow their business, and eventually boost their revenue and profitability by making strategic capex. 

Understanding capex 

A company’s financial planning and analysis must consider capex because it entails sizable investments in long-term assets that will provide future economic gains. As capex decisions frequently involve balancing potential returns on investment against the risks and uncertainties of future cash flows, they can significantly impact a company’s future growth and profitability.  

Acquiring new machinery, building structures, or R&D investments are a few examples of capex. These investments are frequently required to maintain and grow a business, but they can also be dangerous because the expected returns on investment might not occur. 

Types of capex 

Businesses can undertake several types of capex, depending on their needs and goals.  

  • Expansion capex 

One type of capex is expansion capex, which involves investing in new assets to expand a company’s operations or market reach. For example, a retailer might open a new store, or a manufacturer might purchase additional machinery to increase production capacity. Expansion capex can be risky, as it requires a significant upfront investment and may take time to generate returns. 

 Maintenance capex 

Another type of capex is maintenance capex, which involves repairing or replacing existing assets to keep them in good working condition. This type of capex is important to ensure that a business’s operations run smoothly and efficiently. For example, a transportation company might replace an ageing fleet of vehicles to avoid breakdowns and delays. Maintenance capex is typically less risky than expansion capex since it does not involve significant changes to a company’s operations. 

  • Regulatory capex 

This involves complying with government regulations or industry standards. For example, a power plant might invest in pollution control equipment to meet environmental regulations. Regulatory capex can be costly but is necessary for businesses that operate in heavily regulated industries. 

  • Discretionary capex 

It includes investments in assets that are not strictly necessary for a business’s operations but may provide long-term benefits. For example, a technology company might invest in research and development to create new products or acquire intellectual property. Discretionary capex can be risky since it involves investing in uncertain outcomes. 

Formula and calculation of capex 

The formula for calculating capex is as follows: 

 Capex = PP&E at the end of the period – PP&E at the beginning of the period + depreciation expense 


  • PP&E at the end of the period = the total value of the company’s property, plant, and equipment at the end of the accounting period. 
  • PP&E at the beginning of the period = the total value of the company’s property, plant, and equipment at the beginning of the accounting period. 
  • Depreciation expense = the amount of depreciation recorded during the accounting period. 

 Capex is calculated by adding depreciation expenses to the difference between the entire value of PP & E at the start and end of the period. Businesses can use this strategy to estimate the amount they will spend over a given period on long-term assets. 

Capital expenditure (Capex)

Examples of capex 

Capex for a manufacturing company could be acquiring new equipment, such as a new assembly line, expected to last several years and improve productivity and efficiency. Suppose the corporation invested US$1,000,000 in the latest equipment’s procurement and installation. Assume that the PP&E value was US$5,000,000 at the beginning of the period and US$6,500,000 at the conclusion. The business also spent US$100,000 on depreciation over the same frame. 

 Using the capex formula, we can calculate the capex for this investment: 

 Capex = PP&E at the end of the period – PP&E at the beginning of the period + Depreciation Expense 

            = US$ 6,500,000 – 5,000,000 + 100,000 = 1,600,000 

 Therefore, the capex for this investment is US$1,600,000, the same as the amount the company spent on purchasing the new equipment. 

Frequently Asked Questions

Revenue expenditures are costs during regular business operations, while capital expenditures are long-term asset investments. Revenue expenses are reported on the income statement, whereas capital expenditures are shown on the balance sheet. 

Uncertainty regarding future returns on investment, the danger of paying too much or too little attention to costs, and the possibility of unforeseen project delays or adjustments are all challenges associated with capital expenditures. 

Capital investments are significant because they show a company’s long-term commitment to its business operations, property, and expansion. They can also substantially impact the company’s financial situation and prospects. 

Due to the cash inflows required to purchase or improve long-term assets, capital expenditures hurt free cash flow. However, capital expenditures can also enhance a company’s potential for future cash flows and growth. When assessing a firm’s financial stability and growth prospects, investors should consider the relationship between capex and free cash flow. 

Efficient capital expenditure budgeting practices include careful planning and analysis, setting clear priorities and objectives, regularly reviewing and adjusting budgets, monitoring actual spending against budgets, and prioritising projects based on their potential for generating long-term returns on investment. 

    Read the Latest Market Journal

    Predicting Trend Reversals with Candlestick Patterns for Beginners

    Published on Apr 24, 2024 38 

    Candlestick patterns are used to predict the future direction of price movements as they contain...

    Introduction to unit trust

    Published on Apr 23, 2024 32 

    In the diverse and complex world of investing, unit trusts stand out as a popular...

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 537 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 72 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 160 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 90 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 192 

    In a world where the click of a button can send goods across oceans and...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066