What is the Capital Expenditure (CAPEX) Formula?
Capital Expenditure is the total amount that a Company spends to buy & upgrade its fixed assets like PP&E (Property, Plant, Equipment), technology, & vehicles, etc. The formula of Capex is the addition of net change in Property Plant and Equipment (PP&E) value over a given period to the depreciation expense for the same year.
CAPEX Formula = Net Increase in PP&E + Depreciation Expense
Table of contents
Key Takeaways
- The capital expenditure (CapEx) formula calculates how much a company spends on acquiring or upgrading long-term assets, such as property, plant, and equipment (PP&E).
- The formula for capital expenditure is: CapEx = Ending PP&E – Beginning PP&E + Depreciation.
- Capital expenditure represents investments made by a company to maintain or expand its operations, improve efficiency, or support future growth.
- Analyzing capital expenditure helps assess a company’s commitment to long-term investments, ability to generate future cash flows, and strategic focus.
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For eg:
Source: Capital Expenditure Formula (CAPEX) (wallstreetmojo.com)
Steps to Calculate Capital Expenditure (CAPEX)
The calculation of the capital expenditure formula can be done by using the following three steps:
- Firstly, the PPE value at the beginning of the year and the end of the year is collected from the asset side of the balance sheet. Then, the net increase in PPE value is calculated by deducting the PPE value at the beginning of the year from the PPE value at the end of the year.
- Net increase in PPE = PPE at the end of the year – PPE at the beginning of the year
- Next, the accumulated depreciation at the beginning and the end of the year is collected from the balance sheet. Then, the depreciation expense during the year is calculated by deducting the accumulated depreciation at the beginning of the year from the accumulated depreciation at the end of the year. Conversely, the depreciation expense incurred during the year can also be directly collected from the income statement, which is captured as a separate line item.
- Dep. expense = Accum. Dep. at the end of the year – Accum. Dep. at the beginning of the year
- Finally, the capital expenditure incurred during the year can be calculated as either,
Capex Formula = (PPE at the end of the year – PPE at the beginning of the year) + (Accum. dep. at the end of the year – Accum. dep. at the Beginning of the year)
or
Capital Expenditure Formula= (PPE at the end of the year – PPE at the beginning of the year) + Dep. expense
Examples of Capital Expenditure Calculations
Let’s see some simple to advanced examples to understand the calculation of Capital Expenditure.
Example #1
Let us take the example of a company ABC Ltd and calculation of capital expenditure in 2018 based on the following information:
- Depreciation expense is $10,500 in the income statement
- PP&E value at the end of 2018 is $45,500 on the balance sheet
- PP&E value at the beginning of 2018 is $40,000 on the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more
Therefore,
Net increase in PP&E = PP&E value at the end of 2018 – PP&E value at the beginning of 2018
Consequently,
Capital Expenditure (capex) Formula = Net increase in PP&E + Depreciation expense
Therefore, the calculation of Capital Expenditure incurred during 2018 is $16,000.
Example #2
Let us take the example of Apple Inc. and the calculation of capital expenditure in 2017 and 2018 based on the following information:
| Particulars (in Millions) | Sep 29, 2018 | Sep 30, 2017 |
|---|---|---|
| Net PP&E (opening) | $33,783 | $27,010 |
| Net PP&E (closing) | $41,304 | $33,783 |
| Accum. depreciation and amortization (opening) | $41,293 | $34,235 |
| Accum. depreciation and amortization (closing) | $49,099 | $41,293 |
Net increase in PP&E in 2017 = $33,783 – $27,010
Depreciation in 2017 = $41,293 – $34,235
Consequently,
The Calculation of Capital expenditure in 2017 = $6,773 + $7,058
Again,
Net increase in PP&E in 2018 = $41,304 – $33,783
Depreciation in 2018 = $49,099 – $41,293
Consequently,
The Calculation of Capital Expenditure in 2018 = $7,521 + $7,806
CAPEX Formula Video
Frequently Asked Questions (FAQs)
Depreciation is included in the formula because it represents the annual reduction in the value of long-term assets due to wear and tear or obsolescence. Including depreciation in the procedure accounts for the impact of asset depreciation on the company’s capital expenditure.
Calculating capital expenditure helps evaluate a company’s spending on long-term assets and its commitment to maintaining or expanding its operations. It provides insights into the company’s investment strategy, future growth prospects, and financial health.
Yes, capital expenditure can be negative in some instances. A negative capital expenditure indicates a reduction in long-term assets, which can occur when a company sells or disposes of existing assets. Negative capital expenditure implies a decrease in investments in long-term assets.
Capital expenditure represents investments in long-term assets that are expected to generate benefits over multiple accounting periods. Operational expenses, on the other hand, are day-to-day expenses incurred to support the business’s ongoing operations.
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