Primary navigation:

QFINANCE Quick Links
QFINANCE Reference

Home > Balance Sheets Calculations > Capital Expenditure

Balance Sheets Calculations

Capital Expenditure

What It Measures

Capital expenditure (capex) refers to the money a business spends purchasing or upgrading fixed assets for future business benefit. Capital expenditure can include money spent for new property that will be resold, or which might be kept for one or more years. Capital expenditure also includes money spent to improve property (or inventory) that you already own. Under international reporting standards, property is considered to be improved only if the money you spend increases or restores an item’s value, prolongs its useful life, or enables the item to be used for a new purpose.

Back to top

Why It Is Important

Understanding capital expenditure is a vital part of assessing a company’s free cash flow. Basically, if a company spends a lot on capital expenditure but doesn’t show a corresponding rate of growth, it is considered a less attractive investment. Ideally, healthy companies should generate enough positive cash flow to fund dividends/growth as well as capital expenditure.

Back to top

How It Works in Practice

To enable cash flow to be properly assessed it is important to calculate accurately the amount of funds necessary to support capital expenditure—and for the business to continue to operate. This is known as capex per share.

First, you should discount any capital expenditure that is discretionary—such as real estate, which might otherwise be leased.

Then use the following formulas to calculate capex per share based on net cash outflow attributable to property, divided by the weighted average number of ordinary shares in issue during the year:

Capital expenditure = Total asset purchases − Property asset purchases − Nonproperty asset sales


Capex per share = Capex ÷ Weighted average of shares in issue

Back to top

Tricks of the Trade

  • Remember that few companies have smooth capex investment over time. Most companies will have a lean capex year, followed by a year or two of heavy investment. Wherever possible, use an average capex calculation—a single figure can be extremely misleading.

  • Capital expenditure is only used to refer to one-off purchases of new items or improvements to existing assets which are kept and used by the business. So the cost of buying a truck for your business is a capital expenditure, but the cost of hiring a truck is not.

  • It is possible to claim tax relief on a percentage of most capital expenditure, using allowances such as “first year allowance” or “writing down allowance.”

  • One classic example of capital expenditure is the start-up expenses incurred when you buy or create a new business venture. These expenses are considered capital expenditure because the owner incurs them to acquire property that will be kept. These expenses may be fully deducted in year one, or may be amortized over several years.

Back to top

Further reading on Capital Expenditure


Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share