Capex

In a business Capital Expenditure (CAPEX) is required to maintain existing production infrastructure and possibly to expand capacity. CAPEX will give an indication of future business potential and possible funding requirements.

CAPEX stands for Capital Expenditure and refers to the capital investment required during a specific period, typically the annual Accounting Period. CAPEX is the expenditure required to acquire and maintain long-term assets required in production, such as plant and equipment. CAPEX can be divided into two main forms, Maintenance CAPEX and Expansionary CAPEX. While the accounting entry may not make this division, Maintenance CAPEX is relatively stable year on year.

Typically, Expansionary CAPEX is when a new investment in capacity is required to cater for a growing business or a new business altogether. In the valuation of a company, it is important to determine if the required CAPEX is covered by operating profits (EBITDA). The Depreciation allowance is there, in part, to cover future Maintenance CAPEX. Expansionary CAPEX is likely to require external funding.