# 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.

Source: https://learn.tradelabsai.com/fundamentals/capex/  
Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Capex, Depreciation and Amortization", https://learn.tradelabsai.com/fundamentals/capex/

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.

**Example: Capex and free cash flow**
Two companies each generate $1 billion of operating cash flow. Company A, a software firm, spends $50 million on capex, leaving $950 million of free cash flow. Company B, a chipmaker building a new plant, spends $700 million, leaving $300 million. Company B's free cash flow is lower now, but if the new plant earns a high return, its future cash flow could grow faster. Judging capex means asking what return it will earn. See [Free Cash Flow](https://learn.tradelabsai.com/fundamentals/free-cash-flow/) and [ROE, ROA and ROIC](https://learn.tradelabsai.com/fundamentals/roe-roa-and-roic/).

## 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](https://learn.tradelabsai.com/macro/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](https://learn.tradelabsai.com/fundamentals/earnings-quality/) |
| Rising capex with falling returns | Poor capital allocation. See [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/) |

## 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](https://learn.tradelabsai.com/fundamentals/operating-income-ebit-and-ebitda/).
- **DCF models** subtract capex to estimate free cash flow. See [DCF Valuation](https://learn.tradelabsai.com/fundamentals/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.

Next, learn about assets you cannot touch in [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/).

## Continue learning

- Next lesson: [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/)
- Previous lesson: [Working Capital](https://learn.tradelabsai.com/fundamentals/working-capital/)
- Related: [Working Capital](https://learn.tradelabsai.com/fundamentals/working-capital/): Working capital is current assets minus current liabilities. Learn how receivables, inventory and payables affect cash, the cash conversion cycle and warning signs.
- Related: [Free Cash Flow](https://learn.tradelabsai.com/fundamentals/free-cash-flow/): Free cash flow is cash left after running and investing in the business. Learn how to calculate FCF, FCF yield and conversion, and why investors value it highly.
- Related: [Cash Flow Statement](https://learn.tradelabsai.com/fundamentals/cash-flow-statement/): The cash flow statement shows where a company's cash came from and where it went. Learn the three sections, how to read them and why cash flow can reveal problems.
- Related: [Operating Income, EBIT and EBITDA](https://learn.tradelabsai.com/fundamentals/operating-income-ebit-and-ebitda/): Operating income and EBIT measure profit from the core business; EBITDA adds back depreciation and amortisation. Learn the formulas, uses and EBITDA's flaws.
- Related: [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/): Capital allocation is how management spends a company's cash on reinvestment, deals, dividends, buybacks or debt. Learn how to judge good and bad decisions.
- Related: [ROE, ROA and ROIC](https://learn.tradelabsai.com/fundamentals/roe-roa-and-roic/): ROE, ROA and ROIC show how efficiently a company turns capital into profit. Learn the formulas, the DuPont breakdown, why ROIC versus WACC matters and the pitfalls.