CapEx (Capital Expenditures): Definition and Why It Matters
Capital expenditures (CapEx) are cash outflows used to acquire or maintain long-lived assets such as property, plant and equipment. CapEx reduces free cash flow and affects valuation models.
Relation to Free Cash Flow
A common free cash flow definition is:
CapEx timing and maintenance vs. growth classification materially affect valuation. See Free Cash Flow (FCF) for how CapEx flows into DCF.
Practical 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.