Capital Expenditure (CAPEX)

  

Categories: Banking, Accounting, Metrics

Capital expenditures are purchases made by a company to buy or maintain an asset. Or, if you're talking specifically accounting, the money they spent buying or maintain the asset.

The whole buying vs. repairing thing comes in with accounting. Say you're buying an asset (a building for storage, for example), the cost needs to be spread out over the useful life of the asset. On the other hand, if you're repairing a roof on a building you already own, you can deduct that expense right away. This relates back to the estimated value and life of the asset (because it will count on the books as an asset after purchase).

Businesses have varying amounts of capital expenditures, but the figure can be viewed as a ratio. Generally, you can divide the cash flow by the capital expenditure and use that number as a gauge. A high ratio means the company is funding their capital expenditures (their purchases) with funds generated from their business. A low one though means they might not be funding their purchases with cash flows, and they might be borrowing to buy things.

There's no rule against that (businesses are allowed to have loans) but if it gets too out of whack the business could be headed for more debt than it can handle...and potential bankruptcy.

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Finance: What is working capital?268 Views

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of you know when we begin collecting revenues well we have to rent a location,

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