Capital Expenditures

RECENT NEWS
The Times of India  Apr 30  Comment 
State-owned Bharat Petroleum Corp Ltd (BPCL) on Thursday said it has raised $500 million through fixed rate unsecured notes to fund its capital expenditure.
Reuters  Apr 29  Comment 
Coal and iron ore producer Cliffs Natural Resources Inc reported a 28 percent fall in quarterly revenue, and the company cut its capital budget as prices tumble.
Wall Street Journal  Apr 29  Comment 
Hess reported that it would further reduce its capital expenditure, as the energy company swung to a loss.
Reuters  Apr 28  Comment 
Coal and iron ore producer Cliffs Natural Resources Inc reported a 28 percent fall in quarterly revenue, and the company cut its capital budget as prices tumble.
Motley Fool  Apr 18  Comment 
Higher yields and reuse of older equipment in newer manufacturing technologies are driving chip giant Intel's capex cut.
The Hindu Business Line  Apr 16  Comment 
California-based Glaucus Research, well known for shorting stocks, issued a "strong sell" report on software firm Rolta India, saying the company does not produce free cash flow and cann...




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A Capital Expenditure is money a company spends to acquire or upgrade a business asset.

Common examples of a capital expenditure include the purchase of a new building, or the cost of significant upgrades to the equipment in an existing facility. In accounting, a capital expenditure is "capitalized", which means the cost or value of the underlying asset is adjusted for tax purposes and will now include the capital spent to upgrade it. A capital expenditure is considered to be deductible for tax purposes, because it represents an improvement to the business. But it cannot be deducted all at once, in the year in which the money was spent, if the property acquired or upgraded has a useful life longer than the taxable year. In this situation the capital expenditure is subject to Depreciation and Amortization and is deducted over the expected life of the item, rather than all at once, which is what happens with repair or maintenance expenditures.

Thus there is an important distinction between expenses that are "capitalized" by a company and those that are "expensed." A cost for repair or maintenance will appear on a company's Financial statement one time, as a cost incurred that month. But a capital expenditure will be amortized over multiple years, as the value of the underlying asset declines over time, on a company's balance sheet.

Capital expenditure is synonymous with 'capital spending' or 'capital expense' and is also know as CAPEX. The counterpoint of capital expenditures is Operating Expense or OPEX. This is the on-going cost for running a product, business, or system, as opposed to CAPEX which is the cost of developing or providing the parts necessary to make the product or system. For example, the purchase of a laptop computer is a capital expenditure, but the cost of the broadband internet subscription that a worker needs in using the computer is an operating expense.

Applications of CAPEX

Capex is commonly found on the Cash Flow Statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection. Publicly traded companies will often list their capital expenditures for the year in annual reports, which allows stockholders to see how the company is using their money and whether it is investing in its long-term future. Most companies have yearly capital expenditures as they consistently upgrade facilities and equipment.

Examples of CAPEX vs OPEX

  1. A company buys a copy machine (CAPEX); and buys toner and paper to operate it (OPEX).
  2. Installing a new bathroom in company offices (CAPEX); fixing the broken toilet so workers can use it (OPEX).
  3. Large media agency acquires a smaller media company in a cash-and-stock deal (CAPEX); pays the cost to move existing employees into the consolidated company's new offices (OPEX).
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