What is capital expenditure?
CapEx is spending that creates a benefit lasting more than one year. Instead of hitting profit immediately, the cost is capitalised as a [fixed asset](/glossary/fixed-asset) and expensed gradually through [depreciation](/glossary/depreciation) or amortization.
CapEx vs OpEx
- CapEx: buying a delivery van, a new machine, a building extension or a major software build.
- OpEx ([operating expenses](/glossary/operating-expenses)): fuel, repairs, rent and routine maintenance.
The test is whether the spending creates or improves an asset with a useful life beyond the current year. Many businesses set a capitalisation threshold (for example, items under $500 are expensed).
Formula
CapEx = Closing PP&E − Opening PP&E + Depreciation for the period
CapEx appears under investing activities in the [cash flow statement](/glossary/cash-flow-statement).
Example
A restaurant spends $40,000 on a new kitchen expected to last eight years. It records a $40,000 asset and depreciates it by $5,000 a year, instead of reporting a $40,000 expense in the year of purchase.
Why it matters
- Shows how much a business reinvests to grow or maintain capacity.
- Used to calculate [free cash flow](/glossary/free-cash-flow): operating cash flow − CapEx.
- Often qualifies for tax capital allowances or depreciation deductions.