Definition
Capital Expenditure (Capex)
Capex is the money a company spends on acquiring or upgrading long-term assets like plants, machinery, and equipment to grow or maintain operations.
Capex is investment in productive capacity, building a new factory, buying machines, expanding infrastructure, as opposed to day-to-day operating expenses. It is subtracted from operating cash flow to arrive at free cash flow.
A capex upcycle (companies investing heavily) often precedes future earnings growth and benefits capital-goods and infrastructure stocks. But heavy capex strains cash flows and balance sheets in the near term, so investors weigh whether the spending will earn returns above the WACC.
Related terms
- Operating LeverageOperating leverage measures how sharply a company's operating profit swings with changes in sales, driven by its mix of fixed versus variable costs — high fixed costs mean profits soar in good times and crater in bad.
- Free Cash FlowFree cash flow is the cash a company generates after meeting operating expenses and capital expenditure — the surplus it can use to pay dividends, buy back shares, cut debt or grow.
- Weighted Average Cost of Capital (WACC)WACC is the average rate a company must pay to finance its operations, blending the after-tax cost of debt and the cost of equity in proportion to how much of each it uses.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.