Definition
Capital Expenditure (Capex)
Capex is the money a company spends on acquiring or upgrading long-term assets like plants, machinery, and equipment to grow or maintain operations.
Capex is investment in productive capacity, building a new factory, buying machines, expanding infrastructure, as opposed to day-to-day operating expenses. It is subtracted from operating cash flow to arrive at free cash flow.
A capex upcycle (companies investing heavily) often precedes future earnings growth and benefits capital-goods and infrastructure stocks. But heavy capex strains cash flows and balance sheets in the near term, so investors weigh whether the spending will earn returns above the WACC.
Related terms
- Free Cash FlowFree cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
- Operating LeverageOperating leverage is the degree to which a company's profits rise or fall with sales, driven by its mix of fixed versus variable costs.
- Weighted Average Cost of Capital (WACC)WACC is the average rate a company must pay to finance its operations, blending the cost of equity and the cost of debt.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.