CapEx (Capital Expenditures): Definition and Why It Matters
Capital expenditures (CapEx) are investments in long-lived assets; they reduce free cash flow and are key to DCF and ROIC calculations.
Relation to Free Cash Flow
CapEx timing and maintenance vs. growth classification materially affect valuation. See Free Cash Flow (FCF) for how CapEx flows into DCF.
Notes
- Different accounting treatments (capitalizing vs expensing) change reported CapEx and comparability.
- Maintenance CapEx is needed to sustain current operations; growth CapEx expands capacity. Analysts often separate the two when modeling.
- When modelling DCF, align CapEx timing with revenue/capacity ramps and use consistent definitions across peers.
Why it matters
CapEx is a critical determinant of free cash flow and directly impacts valuation models. Capital-intensive businesses require careful analysis of maintenance versus growth spending to assess true cash generation capacity.