Capex, Depreciation and Amortization
Capital expenditures are spending on long term assets like factories and equipment. Learn maintenance vs growth capex, capex intensity and what capex signals.
Capital expenditures, or capex, are what a company spends on long term physical and some intangible assets: factories, equipment, data centres, stores, vehicles and capitalised software. Capex does not hit the income statement immediately; instead, the cost is spread over the asset's life through depreciation. On the cash flow statement, however, capex is a real cash outflow. Understanding capex is essential for judging free cash flow, comparing businesses and spotting whether a company is investing for growth or struggling to maintain what it has.
How capex flows through the statements#
| Statement | Effect |
|---|---|
| Cash flow statement | Capex appears as a cash outflow in investing activities |
| Balance sheet | Adds to property, plant and equipment (PP&E) |
| Income statement | Recognised gradually as depreciation expense |
Maintenance vs growth capex#
| Type | Purpose | Example |
|---|---|---|
| Maintenance capex | Keep existing operations running | Replacing worn equipment, refurbishing stores |
| Growth capex | Expand capacity or enter new markets | New factories, new data centres, new stores |
Companies rarely split these in their reports. A common rough estimate of maintenance capex is depreciation, since depreciation reflects the wearing out of existing assets, though inflation and technology changes make this imperfect.
Capex intensity#
capex intensity = capex / revenue| Industry | Typical capex intensity |
|---|---|
| Software | Low, often under 5% |
| Consumer brands | Low to moderate |
| Retail | Moderate |
| Semiconductors (manufacturing) | High, often 20% to 40% |
| Telecoms | High, often 15% to 20% |
| Utilities | High |
| Oil and gas | High and cyclical |
Approximate ranges that vary by company and period.
Capex cycles#
In capital intensive industries, capex tends to follow profits: when prices are high, companies invest heavily; new supply arrives a few years later and pushes prices down; then investment falls. Oil, mining, shipping and semiconductors show strong capex cycles. Some investors look for industries where capex has been cut deeply, expecting future supply shortages and higher prices. See Business and Economic Cycles.
The AI capex boom#
From 2023 onward, large technology companies sharply increased spending on data centres and AI chips. Combined annual capex at several of the largest cloud providers rose to well over $200 billion, a major story for investors who debated whether the spending would earn adequate returns and how it would affect free cash flow.
Red flags and signals#
| Signal | Possible meaning |
|---|---|
| Capex consistently below depreciation | Underinvestment; assets ageing |
| Sudden capex jump | Expansion, or a costly project with uncertain returns |
| Capitalising costs that rivals expense | Flattering profits and operating cash flow. See Earnings Quality and Cash Conversion |
| Rising capex with falling returns | Poor capital allocation. See Capital Allocation and Management |
Capex and valuation#
- EBITDA ignores capex, so capital heavy businesses can look cheap on EV/EBITDA. Subtract capex for a truer view. See Operating Income, EBIT and EBITDA.
- DCF models subtract capex to estimate free cash flow. See DCF Valuation.
- Return on invested capital shows whether capex creates value.
Frequently asked questions#
What are capital expenditures?#
Spending on long term assets such as property, equipment and capitalised software, recorded as investing cash outflows and depreciated over time.
What is the difference between maintenance and growth capex?#
Maintenance capex keeps existing operations running; growth capex expands capacity or enters new markets.
Why does capex matter for investors?#
Because it reduces free cash flow, and whether it earns good returns determines whether it creates or destroys value.
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Mentioned in
- Working CapitalFundamental Analysis
- DCF ValuationFundamental Analysis