How to calculate capital expenditure?

How to calculate capital expenditure? Capital Expenditure

Capital expenditure, referred to as Capital Expenditure in English, refers to the company's long-term investment to purchase, maintain or upgrade fixed assets (such as properties, plants, and equipment), as well as purchase intangible assets such as trademarks and copyrights.

These long-term investments include not only tangible assets such as factories, land, equipment, and office desks, but also intangible assets such as patents and trademarks. The useful lives of these assets usually exceed one year.

Capital expenditures are not listed directly in the company's financial statements, but are distributed in different chapters of the financial statements, including expenditures on properties, plants, equipment, etc., as well as depreciation and amortization.

If the asset purchased by the company brings benefits to the company within one year, it will not be included in the capital expenditure, but will be included in the cost of sales (directly related to production) or operating expenses (not directly related to production). Here is Apple's September 2023 cash flow statement as an example.

You can find "Payments for acquisition of property, plant and equipment" directly from the table. The value of this item directly reflects the company's capital expenditures.

So, Capital expenditures = $10,959 million Second type: Calculation through indirect methods If the "Purchase of property, plant and equipment" item cannot be obtained directly from the cash flow statement, the following method can be used to calculate it indirectly: The calculation method is to add the difference between the end of the period and the

beginning of the period for property, plant, and equipment (PP&E) expenditures during the financial year and the depreciation and amortization of the current period, that is: Capital expenditures = PP&E final value – PP&E initial value + depreciation and amortization Among them: PP&E is short for property, plant and equipment and can be found on the balance

sheet in a company's financial reports; Depreciation & Amortization can be found on the cash flow statement in a company's financial report. Example calculations using Apple's September 2023 financial report: Its balance sheet is below, and you can see its PP&E values through September 2020 and September 2021.

numerical value September 2022 PP&E value (initial value) $42,117 million September 2023 PP&E value (last value) $43,715 million Its cash flow statement is as follows, and you can find the depreciation and amortization expenses for the current period.

Depreciation and amortization (September 2023) $11,519 million As can be seen from the data sheet, in Apple's 2023 financial year, the initial value of PP&E is $42,117 million, the final value is $43,715 million, and depreciation and amortization expenses are $11,519 million.

Therefore, Apple’s capital expenditures in fiscal year 2023 are: = $43,715 million – $42,117 million + $11,519 million = $13,117 million Errors between the two calculation methods The results are likely to be different when capital expenditures are calculated using the direct method and the indirect method.

The direct method obtains capital expenditure data directly through the investment activity part of the cash flow statement, so it can better reflect the actual cash outflow and has higher accuracy.

The indirect method is based on data from the balance sheet and income statement, and while it can provide an estimate of capital expenditures, the results may differ from actual capital expenditures because it does not take into account the details of cash flows and possible non-cash adjustments.

In order to calculate and analyze capital expenditures most accurately, it is recommended to rely primarily on the direct method, obtaining data from the cash flow statement, combined with the indirect method to understand the overall picture of changes in asset value. What guidance is there on capital expenditures?

Capital expenditures can be compared to a company's depreciation and amortization to measure the change in a company's assets: When capital expenditure > depreciation and amortization, it means that the company's assets are growing; When capital expenditure < depreciation and amortization, it means that the company's assets are locking up.

Capital expenditures can be used to calculate Free Cash Flow (FCF), and the calculation formula is:

Free cash flow = operating cash flow – capital expenditures It can be seen from the calculation formula that when a company increases the funds used for long-term assets, its free cash flow will decrease. Therefore, the company's capital expenditure growth must match its revenue growth to ensure relatively stable long-term free cash flow.

Capital expenditures can be used to calculate the ratio of operating cash flow to capital expenditures by dividing a company's operating cash flow by capital expenditures, which is: Cash Flow to Capital Expenditure Ratio = Operating Cash Flow ➗ Capital Expenditure The ratio measures whether a company's operating income is sufficient to cover its capital expenditures.

When the ratio > 1, it means that the company's operating income can cover its capital expenditure; When the ratio is < 1, it means that the company's operating cash flow is insufficient to cover capital expenditures and it may need to borrow money to cover its capital expenditures, which usually indicates that the company's cash flow has problems.

Used to calculate Free Cash Flow to Equity. This value means the amount of cash available to shareholders in the company's assets.

The calculation method is: Free cash flow to equity = net profit + depreciation and amortization – capital expenditures – increase in net working capital + net borrowings Net Income: A company's net profit after deducting all expenses, taxes and interest.

Depreciation & Amortization: These are non-cash expenses that need to be added back to net income because they do not involve actual cash outflows. Capital Expenditures (CapEx): Expenditures used to acquire or maintain fixed assets, which need to be deducted from cash flow. Change in Net Working Capital: This is a change in working capital.

If working capital increases, it means that the company uses more cash and needs to be deducted from cash flow; if it decreases, cash flow increases. Net Borrowing: If a company increases net borrowing (borrowing more than it repays) during the period, this will bring additional cash inflows to the company and need to be added back. Capital Expenditures vs.

Operating Expenses Operating expenses, also known as Operating Expense in English, abbreviated as OpEx, refer to the expenses that a company needs to pay for daily operations, such as employee wages, factory electricity bills, office space rent, etc.

The main difference from capital expenditure is: Capital Expenditure (CapEx) Operating Expenses (OpEx) meaning Capital expenditures to purchase, maintain or upgrade long-term assets with a benefit period of greater than one year Short-term expenses required to complete operating business Example Purchase tangible assets such as property, land, equipment, and office desks, and intangible assets such as networks and software Rent, wages, electricity bills, transportation costs, etc.

Accounting Recording Method Tangible assets are recorded as depreciation and intangible assets are recorded as amortization All amounts in this section must be totaled and recorded separately in each financial year. More investment guides What are Bollinger Bands and how do I use them? What is Moving Average (MA)? What is the Money Flow Index (MFI)?

And How to use it? What is the Federal Reserve Balance Sheet? What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate?

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