How To Calculate Capital Expenditures (CapEx)

By Indeed Editorial Team

Updated July 25, 2022 | Published February 4, 2020

Updated July 25, 2022

Published February 4, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

When you own a business and invest in various things such as a new building or equipment, it's important to consider how much money you're spending and at what cost. To do this, you'll need to calculate capital expenditures. Doing so will help you determine which investments were profitable overall and which resulted in a financial loss.

In this article, we explain what capital expenditures are, how to calculate capital expenditures and how to use them, and provide examples of capital expenditures.

What are capital expenditures?

Capital expenditure is the amount spent by businesses or corporations to purchase, maintain or improve fixed, tangible assets. This is often also referred to as capital expense and is abbreviated as CapEx for short.

The fixed assets that capital expenditures tend to are any assets that will be of operating use in the future (more than one accounting period) and include various things such as equipment, land, computer purchases, vehicles or buildings. These assets will vary depending on the type of business and industry your company is in. Typically speaking, they're purchased by companies when they're looking to undertake a new project or enhance an old one.

Because it is an expense, capital expenditures can be found as a negative value on a company's cash flow statement for a given accounting period. It can also be found as an asset on the balance sheet. The used assets will begin to depreciate over time, though the exact time will depend on the usage and the asset itself. For example, a computer might last five years, whereas a building will last much longer. Regardless, the amount of depreciation can be deducted from the company's taxes.

Read more: Capital Expenditure (CapEx): Definition and Formula

How to calculate capital expenditures

If you have access to your company's cash flow statement or its income statement and balance sheet, you won't need to perform a calculation by hand. Either way, doing the calculation by hand will help you to better understand the concept and what it entails. Follow these steps to calculate capital expenditures:

1. Obtain your company's financial statements

To calculate capital expenditures, you'll need your company's financial statements for the past two years. These documents will provide you with the values you need to perform the calculation.

2. Subtract the fixed assets

Next, you'll subtract the fixed assets on the financial statement from the previous year from the fixed assets listed for the year that has just ended. This will determine the change in these fixed assets. From here, you'll need to eliminate intangible assets since capital expenditure only uses tangible asset expenditures. It's also important to avoid any assets that your company received through that reporting period's acquisitions.

3. Subtract the accumulated depreciation

Next, subtract the previous year's accumulated depreciation from the accumulated depreciation for the year that has just ended. This will give you that year's total depreciation.

4. Add total depreciation

Once you've made the subtractions, add the depreciation calculated in step three to the change in fixed assets determined in step two. This will result in the total capital expenditures for the period you're measuring.

Using the income statement and balance sheet, you can use the following formula where PP&E refers to property, plant and equipment. Property, plant and equipment is a line item on your company's balance sheet.

Capital expenditures = PP&E (current period) - PP&E (prior period) + depreciation (current period)

Related: What Is an Expenditure? 3 Types and Examples

How to use capital expenditures

Once you've calculated your company's capital expenditures, you can use this total to help with your financial planning. This is because your company's capital expenditures will allow you to see how much money is being invested in new or existing fixed assets.

This can then help guide your decisions based on how much you've spent on fixed assets in previous periods. Ideally, you want to invest in assets that will make the highest profit for your business. Also, it's wise to choose assets that will have a long lifespan. Calculating your capital expenditures can help you gain insight into your future investments in the hopes of avoiding any financial losses. The financial decisions your company makes have the potential to hurt or help it make a profit. Make sure to make wise decisions and do a thorough and accurate capital expenditures calculation.

Related: CAPEX vs. OPEX: What's the Difference?

Examples of CapEx calculations

Various scenarios can help you better understand capital expenditures. Here are a few examples that can guide you through your own calculations:

Example 1

Let's say you own a furniture company and in 2018, you decided to spend money on new equipment and an expanded facility. You then decide to calculate your company's capital expenditures for that year. You determine the following information:

  • Depreciation = $15,000

  • PP&E at the end of 2018 = $50,000

  • PP&E at the beginning of 2018 = $35,000

Given these values, you can begin your capital expenditure calculations.

Start by subtracting the PP&E value at the beginning of 2018 ($35,000) from the PP&E at the end of 2018 ($50,000). This will give you a change in PP&E of $15,000. Next, add this value to the depreciation expense ($15,000). This will result in a capital expenditure of $30,000 for the year 2018.

Example 2

You own a boutique and purchased new equipment and computers for your workplace in 2018. To calculate your capital expenditures in 2018 you've gathered the following information from your financial documents:

  • Depreciation in 2018 = $20,000

  • PP&E for the current period = $15,000

  • PP&E for the prior period = $10,000

Calculate your company's capital expenditures using the following formula:

Capital expenditures = PP&E (current period) - PP&E (prior period) + depreciation (current period)

Capital expenditures = ($15,000 - $10,000) + $20,000

Capital expenditures = $5,000 + $20,000

Capital expenditures = $25,000

Therefore, your company's capital expenditures for 2018 was $25,000.

Related: How To Calculate Net Capital Spending (With Tips)

Jobs that work with capital expenditures

The financial field has several positions that involve calculating capital expenditures. Here are several careers in finance that may require you to find a company's capital expenditures:

1. Asset manager

2. Property manager

3. Accountant

4. Financial analyst

5. Account manager

6. Investment advisor

7. Real estate agent

8. Logistics coordinator

9. Budget analyst

10. Treasurer

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