# CAPEX

Capex (capital expenditure), in Spanish capital expenditure, is the investment in capital or fixed assets that a company makes either to acquire, maintain or improve its non-current assets.

It is explained as the investment necessary to maintain or expand capital assets (factories, machinery, vehicles, etc.). It is very important within the activity of a company and its future evolution.

We know that the future of a company, its growth, and the cash flows it generates will depend on the investments made. Therefore, Capex is a highly relevant element in a company's business. In addition, it provides us with information about whether the company is investing to continue growing or simply to maintain itself.

## Disaggregating Capex

The investment in fixed assets by the company can be classified into two types, regarding the object of that investment:

• Maintenance Capex: It is known as the replacement investment. In other words, the investment necessary to cover the impairment and amortization expense of fixed assets. So it could be understood as the necessary investment by the company to maintain the same current sales level.
• Expansion Capex: It is the investment necessary in fixed assets to increase the current level of sales. That is, what the company invests to acquire new fixed assets and / or improve the current one.

Therefore, the total investment in Capex by the company will be the sum of the two previous ones. With which, a company will carry out an expansion strategy when the total level of Capex is greater than the amortization expense. This means that you are investing not only to replenish assets, but also to increase or improve them.

## Finding Capex in financial statements

The investment made by companies in Capex can be found directly in the statement of cash flows. More specifically in the cash flow of investment activities. However, there is a very simple formula to be able to calculate it using only the income statement and the balance sheet.

As mentioned above, the total Capex will be the sum of the maintenance and the expansion. In addition, we have assimilated the maintenance Capex to the company's amortization expense. Therefore, the formula to calculate the Capex starts from this sum. Mathematically, its calculation is as follows:

Capex = Net Property, Plant and Equipment (year t) - Net Property, Plant and Equipment (year t-1) + Amortization (year t)

In other words, to calculate the Capex we follow the following steps:

1. We take the company's balance sheet for the current year and look at the Net Fixed Assets data.
2. We subtract from the Current Net Assets the Net Assets from the balance of the previous year.
3. To the result we add the amortization expense for this year that is found in the income statement.

## CAPEX example

Suppose a company that has published its balance sheet for the previous and current year, and its current income statement. And with this we want to see the investment in Capex made during this year.

Summary Balance Sheet (figures in thousands of €)
ActiveYear 0Year 1 passiveYear 0Year 1
Box58 Short Term Fra Debt150200
Stocks150100 Providers20076
Customers300500 Remun pending payment7523
Other current assets502 Other liabilities operating circ2520
Total Current Assets555 675 Total Current Liabilities482 377
Financial Fixed Assets3250 Other long-term liability1536
Fixed Matter Net550 800 Long-term financial debt22569
Other Fixed Assets42107 Total Long Term Liabilities240 105
Total Non-Current Assets917 907
Equity Funds750 1.100
TOTAL ASSETS1.472 1.582 TOTAL LIABILITIES1.472 1.582

Being the income statement:

Summary income statement
thousands of €Year 1
Sales2.000
Cost of Sales
Gross margin1.400
Personal expenses
General expenses
Other expenses
EBITDA1.085
Amortization
EBIT1.020
Financial income35
Financial expenses
Financial results
Rdo Before Tax1.000
Taxes
Net profit700

Following the formula described above and with the help of the financial statements of the company attached in the example, the result of the investment in Capex will be:

Capex = (800-550) + 65 = 315.

As we can see in this case, the company is carrying out an expansion policy, since Capex> Amortizations.

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