US & World Economies

What Is Capital Expenditure (CapEx)?

Updated on December 30, 2021

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A man in goggles inspects machinery — Photo:
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Definition

Capital expenditure is money a company uses to acquire new assets, add to current assets, or improve assets for the benefit of improving a business, such as buying new equipment.

Key Takeaways

Capital expenditures are money a company uses to improve or acquire new assets with the objective of growing and improving the business as a whole.
Capital expenditures are often referred to as CapEx or capital expenses.
Examples of capital expenditures include improving or purchasing assets such as property and equipment.
Operational expenditures are short-term, day-to-day expenses, whereas capital expenditures are long-term investments in acquiring and improving assets.
A business with a proven track record of a sound capital expenditure strategy may be a potential investment opportunity, with other financial factors considered.

Definition and Example of Capital Expenditure

Capital expenditure, also known as CapEx, is money a business spends to acquire, improve, or maintain physical long-term assets. Capital expenditures are used to develop a new business or as a long-term investment of an existing business.

Capital expenditures are necessary for a company to grow its current business operations. They are the part of the budget allocated to maintaining and improving the equipment and assets to keep the business running. They can also be expenses related to the expansion of the company by acquiring new assets.

Alternative name: Capital expenses, CapEx

For example, a plastic manufacturing plant may purchase property and infrastructure to expand its business capacity. All the expenses related to buying the property, buildings, equipment, and machinery would be capital expenditures.

Note

Costs associated with improving a machinery’s useful life would also be considered a capital expenditure because they help extend the useful life of the equipment.

How Capital Expenditures Work

Rather than being shown as an expense, capital expenditure is recorded or capitalized as a long-term asset. It is considered an investment because the company is expanding or maintaining its business and assets.

Examples of common capital expenditures are purchasing long-term assets such as equipment, property, tools, infrastructure, machinery, warehouses, furniture, and vehicles; or intangible assets like patents and licenses.

However, expenses related to the repair and general maintenance of an asset are not considered a capital expenditure. Instead, they’re classified as “repairs.”

Types of Capital Expenditure

The IRS categorizes types of capital expenses that businesses can capitalize: business startup costs, business assets, and improvements. These specific expenses may include:

Land
Buildings
Machinery
Warehouses
Furniture
Vehicles
Software
Equipment
Intangible assets (patents, licenses, trademarks, etc.)

In short, any expenditures related to acquiring new assets such as those listed above or upgrading these assets is a type of capital expenditure.

Capital Expenditure vs. Operational Expenditure

Capital expenditures are related to growing and improving the assets of a business. They are considered long-term investments. Operational expenditures (OpEx), on the other hand, are expenditures related to the day-to-day operation of a business.

Here’s how they compare:

Capital Expenditure (CapEx)	Operational Expenditure (OpEx)
Long-term investments in improving and acquiring new assets for a business	Shorter-term expenses related to the day-to-day operations of a business
Items are capitalized as an asset	Items are expensed
Assets that depreciate over time	Expenses that are accounted for in the current year’s accounting period
Examples include improving or buying assets such as property, a plant, and equipment (PP&E)	Examples include expenses such as rent, utilities, advertising, administration fees, etc.

What It Means for Individual Investors

For investors to better understand the financial health and prospects of a business, they should thoroughly understand the capital expenditures.

A company that has a sound strategy for how they manage its capital expenditures can provide a potential investment opportunity. Of course, investors should consider many other aspects of a company before investing.

After all, a company that takes its profits and reinvests them into promising, long-term assets may have a well-developed plan for long-term growth. Conversely, a company that does not focus well on investing in its growth may be headed for challenges.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

IRS. "Business Expenses." Page 3. Accessed Aug. 30, 2021.