Capex Is: Definition, How to Calculate, and the Difference with Opex

Capex is a company's expenditure to purchase, build, or improve long-term assets that benefit more than one period. Examples include purchasing machinery, building factories, operational vehicles, technological equipment, and developing specific assets.

Key Takeaways

• Capex is used to acquire or enhance long-term assets, not to finance daily operational activities.
• Capex can be calculated directly from the cash flow statement or estimated through changes in fixed assets plus depreciation.
• The main differences between Capex and Opex lie in the useful life, accounting records, and their impact on cash flow and profit.

What is Capex?

Capital expenditure or Capex is capital expenditure made by a company to acquire, add, build, or improve long-term assets.The asset is expected to provide economic benefits over more than one accounting period.

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Capex expenditure is usually related to assets such as:

• Land and buildings.
• Production machines.
• Operational vehicles.
• Factory equipment.
• Computers and servers.
• Network infrastructure.
• Certain software.
• Major renovation.
• Warehouse construction.
• Business facility development.

For example, a company purchases a production machine worth Rp2 billion to be used for eight years. This expenditure not only provides benefits in the year of purchase but also supports production activities for several years to come.

Because the benefits are long-term, the purchase price of the machine is generally recorded as an asset. The cost is then allocated gradually through depreciation over the asset's useful life, rather than being charged in full as an expense in the year of purchase.

The principles for recognizing fixed assets, their carrying value, depreciation and impairment are regulated in the standards related to property, plant and equipment.

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Why is Capex Important for Companies?

Capex shows how much a company invests to maintain or develop its operational capabilities.

Companies can use Capex to:

• Increase production capacity.
• Replacing an outdated engine.
• Opening a new branch.
• Building a distribution center.
• Improve operational efficiency.
• Developing digital infrastructure.
• Meets safety standards.
• Extend the useful life of assets.
• Support business expansion.

High capex isn't always a bad thing. Companies building factories or expanding their networks may need significant investments before generating additional revenue.

However, Capex doesn't automatically indicate a healthy business. Poorly planned capital expenditures can burden cash flow, increase debt, and create unproductive assets.

Therefore, Capex needs to be evaluated along with the company's revenue growth, operating cash flow, debt levels, asset utilization, and investment returns.

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What are the Types of Capex?

In general, Capex can be grouped based on its intended use.

Maintenance Capex

Maintenance Capex is expenditure to maintain existing operational capacity and quality.

For example:

• Replacing damaged or worn out machines.
• Updating old servers.
• Renovate the facilities to keep them fit for use.
• Replacing old operational vehicles.
• Updating factory security systems.

The goal is not to directly expand the business, but rather to prevent the company's operational capabilities from declining.

Growth Capex

Growth Capex is spending to expand capacity or create new sources of growth.

For example:

• Building additional factories.
• Opening a new stall.
• Purchasing land for expansion.
• Adding distribution fleet.
• Building a new data center.
• Developing new production lines.

Growth Capex is expected to result in increased revenue or efficiency in the future.

Mandatory Capex

Mandatory Capex is capital expenditure required to comply with legal, safety, environmental, or industry standards.

Examples include installing emission control devices, upgrading safety systems, or replacing facilities to comply with regulations.

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Examples of Capex in Business Activities

Business owners often struggle to distinguish between asset purchases and routine expenses. Here are some easily identifiable examples of CapEx.

Manufacturing Company

The company purchased an automated machine worth IDR 5 billion to increase production capacity. The machine was used for several years and is therefore categorized as capital expenditure (CapEx).

Logistics Company

The company purchased 20 new trucks to expand its distribution network. The vehicle purchases are considered capital expenditures.

Technology Company

Companies purchase servers and build data centers to support digital services. These expenses can be categorized as CapEx if they meet the company's capitalization requirements.

Retail Business

A company is extensively renovating a building to open a new store. Renovations that increase the utility or extend the useful life of an asset can be treated as capital expenditure.

Small business

A coffee shop purchases a commercial espresso machine with an estimated five-year lifespan. The purchase is considered capital expenditure (CapEx), not daily operating expenses.

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How to Calculate Capex

There are two general approaches to determining a company's Capex value.

1. View the Cash Flow Report

The most direct way is to check the section cash flow from investing activities.

Cash payments to acquire fixed assets, intangible assets, and other long-term assets are generally presented as investing cash flows.

Account names that may appear include:

• Purchase of fixed assets.
• Acquisition of property and equipment.
• Purchase of land and buildings.
• Acquisition of fixed assets.
• Addition of fixed assets.
• Purchase of intangible assets.

For example, the cash flow statement shows:

• Machine purchase: Rp1.2 billion.
• Vehicle purchase: Rp. 300 million.
• Purchase of server equipment: Rp. 500 million.

Total Capex kas:

Rp1.2 billion + Rp300 million + Rp500 million = Rp2 billion

The cash flow statement approach is usually better because it shows the money actually spent during the period.

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2. Using Fixed Asset Changes

If details of asset purchases are not available, Capex can be estimated using net fixed asset value and depreciation.

The simple formula:

Capex = Ending Net Fixed Assets − Beginning Net Fixed Assets + Depreciation

This formula is derived from the relationship that ending fixed assets essentially reflect beginning assets plus capital expenditures and minus depreciation. However, the results are estimates and may be affected by asset sales, company acquisitions, reclassifications, impairments, and exchange rate changes.

Capex Calculation Example

A company has the following data:

• Net fixed assets at the beginning of the year: Rp8 billion.
• Net fixed assets at the end of the year: Rp10 billion.
• Depreciation expense: Rp1.5 billion.

The calculation:

Capex = Rp10 billion − Rp8 billion + Rp1.5 billion

Capex = Rp3.5 billion

Based on this formula, the company's estimated Capex is IDR 3.5 billion.

Limitations of the Capex Formula

The fixed asset change formula does not always produce exact asset purchase figures.

For example, a company sells a machine with a book value of Rp500 million. This sale reduces the ending fixed asset balance and can understate the Capex calculation.

Therefore, investors should compare:

• Statement of financial position.
• Cash flow statement.
• Fixed asset records.
• Depreciation expense.
• Sale or disposal of assets.
• Company acquisitions and divestments.

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Difference between Capex and Opex

Capex and Opex both cause companies to spend money, but their purposes and accounting treatments are different.

Capex

Capex is used to acquire or increase long-term assets.

Its characteristics:

• Benefits last for more than one period.
• Recorded as an asset if it meets the capitalization criteria.
• Its value is allocated through depreciation or amortization.
• Generally appears in investing activities in the cash flow statement.
• They are usually of greater value and do not occur every day.
• Related to the company's capacity or infrastructure.

Opex

Operating expenditure or Opex is the cost of running daily business activities.

For example:

• Employee salary.
• Electricity bills.
• Short term office rental.
• Marketing costs.
• Fuel.
• Office supplies.
• Internet costs.
• Routine maintenance.
• Administrative costs.
• Professional services.

Opex is generally charged directly to the income statement in the period in which it occurs because its economic benefits are consumed in the short term.

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Example of the Difference between Capex and Opex

The difference between Capex and Opex is easier to understand through the following situation.

Buying a Vehicle and Buying Fuel

Purchase of operational vehicles includes Capex because the vehicles are used for several years.

Vehicle fuel is included in Opex because it is consumed for daily activities.

Buying a Machine and Performing Routine Service

Purchase of new production machines includes Capex.

Minor servicing, lubrication, and routine maintenance are usually considered Opex because they simply maintain the normal condition of the asset.

However, major improvements that extend the useful life or significantly increase the capacity of an asset may qualify as Capex.

Building an Office and Paying for Electricity

Construction of office buildings including Capex.

Monthly electricity bill includes Opex.

Buying a Server and Paying for a Cloud Subscription

Purchasing a server that will be used for several years can be a Capex.

Monthly cloud subscription fees are typically Opex because they are paid periodically to obtain the service.

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Is Capex Recorded as an Expense?

Capex is not directly charged in its entirety to the income statement when its expenditure meets the criteria for being an asset.

For example, a company purchases a machine for Rp600 million with a useful life of six years. In the illustration of straight-line depreciation with no residual value:

Annual depreciation = Rp600 million ÷ 6 years

Annual depreciation = Rp100 million

The company recorded the machine as an asset for Rp600 million when it was purchased. Subsequently, depreciation expense of Rp100 million was recognized annually for six years.

Even though the payment is made in stages, a cash outflow of IDR 600 million can occur immediately when the machine is paid for.

This is why profit and cash flow can paint a different picture. The income statement only records current-period depreciation, while the cash flow statement can show the full amount of capital expenditures.

Where is Capex Recorded in Financial Statements?

Capex can impact three main financial statements.

Statement of Financial Position

Capex adds value to fixed assets or other long-term assets.

After that, the carrying amount of the asset may decrease due to depreciation, amortization, impairment, or disposal of the asset.

Income statement

The Capex value does not immediately appear entirely as an expense.

What arises is depreciation or amortization over the useful life of the asset.

Cash Flow Statement

Payments to purchase fixed assets are generally recorded as cash outflows from investing activities.

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The Relationship Between Capex and Free Cash Flow

Capex is an important component in calculating free cash flow.

The simple formula for free cash flow is:

Free Cash Flow = Operating Cash Flow − Capex

For example:

• Operating cash flow: Rp12 billion.
• Capex: Rp5 billion.

For:

Free Cash Flow = Rp12 billion - Rp5 billion

Free Cash Flow = Rp7 million

Free cash flow shows the cash remaining after a company finances operations and long-term asset investments.

However, investors need to understand the causes of Capex. Low free cash flow isn't necessarily a bad thing if a company is building a facility that's expected to generate significant growth.

Conversely, high free cash flow is not necessarily always positive if the company delays machine replacement and under-invests to maintain competitiveness.

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How to Assess a Company's Capex

Capex should not be analyzed solely based on the size of the numbers.

Please note the following points:

Compare with Income

Calculate how much Capex is compared to the company's revenue.

Companies with Capex growing faster than sales need to explain how those investments will generate growth.

Compare with Depreciation

Capex that consistently falls below depreciation may indicate the company is not replacing aging assets properly.

However, such comparisons need to take into account technological efficiencies, asset disposals, and business model changes.

Check Operating Cash Flow

Companies that are able to finance Capex from operating cash flow typically have better flexibility than companies that continue to rely on debt.

Pay Attention to Debt Levels

Large capex financed with loans can increase interest expenses and financial risks.

Investment Results Evaluation

Investors need to see whether Capex produces:

• Capacity increases.
• Income growth.
• Better margins.
• Cost efficiency.
• Increased cash flow.
• Healthy return on invested capital.

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Common Mistakes in Understanding Capex

Treat All Equipment Purchases as Capex

Not all items are automatically recorded as assets. Companies typically have capitalization limits based on value, useful life, and materiality.

Small value items can be directly charged as Opex even if they are used in more than one period.

Consider All Improvements as Opex

Routine maintenance is typically considered Opex. However, major renovations or improvements that extend the life and enhance the asset's usefulness can be capitalized.

Considering High Capex Always Positive

Large capex can indicate expansion, but it can also reflect overpriced projects or poor capital management.

Ignoring Asset Sales

The Capex formula based on changes in fixed assets can be misleading if the company makes large asset sales.

Comparing Companies from Different Industries

Mining, telecommunications, manufacturing, and utilities companies typically require high Capex.

In contrast, service or software-based companies may have lower physical asset requirements.

Capex in Investment Decisions

For investors, Capex helps explain how management allocates capital.

Questions that can be asked include:

• Is Capex used for growth or just asset replacement?
• Does the investment result in increased income?
• Does the company finance Capex with cash or debt?
• Was the project completed within budget?
• How long is the payback period?
• Does the company have sufficient cash flow?
• Does Capex create competitive advantage?

Investors shouldn't simply look at the increase in fixed assets. Management must be able to explain the investment rationale, projected benefits, and project risks.

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Conclusion

Capex is a company's expenditures to acquire, build, replace, or upgrade long-term assets. Examples include the purchase of machinery, vehicles, buildings, servers, and production facilities.

The most direct way to determine Capex is through the cash flow statement under investing activities. If this data is not available, Capex can be estimated by adding depreciation to the change in net fixed assets.

The main difference between Capex and Opex lies in their useful life and accounting. Capex provides long-term benefits and is typically capitalized, while Opex is used to support day-to-day operations and is generally expensed immediately.

High capex isn't necessarily good or bad. Its value should be assessed based on the company's investment objectives, funding capabilities, expected returns, and the nature of its industry.

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FAQ

What is meant by Capex?

Capex is spending to purchase, build, or improve long-term assets. These assets are expected to provide benefits over more than one period.

What are some examples of Capex?

Examples include the purchase of machinery, vehicles, buildings, land, servers, and production equipment. Major renovations that increase the asset's usefulness may also be considered CapEx.

What is the formula for calculating Capex?

The simple formula is ending net fixed assets minus beginning net fixed assets, then add depreciation. For more accurate results, check asset purchases on the cash flow statement and the financial statement notes.

What is the difference between Capex and Opex?

Capex relates to long-term asset investments, while Opex finances day-to-day operational activities. Capex is typically capitalized, while Opex is expensed directly in the current period.

Does Capex affect profit?

Capex doesn't always reduce profits by the same amount as the purchase price in the same year. The impact is usually through depreciation or amortization expense over the asset's useful life.