Capital Expenditures (CapEx)

Maintenance CapEx is the minimum spending required to keep existing assets in working condition and sustain current revenue levels. Growth CapEx is discretionary spending on new capacity, facilities, or technology to drive future revenue expansion. This distinction matters for valuation because maintenance CapEx is a recurring obligation while growth CapEx is optional. Most companies do not separately disclose the two, so analysts often estimate maintenance CapEx as roughly equal to annual depreciation.

Free cash flow is calculated as operating cash flow minus capital expenditures, making CapEx one of the largest deductions from cash available to investors. Companies with high CapEx intensity (CapEx as a percentage of revenue) generate less free cash flow relative to their earnings. This is why asset-light business models like software companies tend to trade at higher FCF yields than capital-intensive industries like utilities or airlines. When building a DCF, forecasting CapEx accurately is essential to avoid misstating intrinsic value.

On the cash flow statement, CapEx is listed as 'Purchases of Property, Plant, and Equipment' under investing activities. On the balance sheet, CapEx increases the gross PP&E line item and is then reduced over time through depreciation. The income statement captures the cost indirectly through depreciation expense, spreading the CapEx over the asset's useful life. This treatment follows the matching principle of accrual accounting.

Analysts typically forecast CapEx as a percentage of revenue, guided by historical trends and management guidance. Capital-intensive industries may run at 15-25% of revenue while asset-light businesses may be below 5%. It is important to check whether a company is in an investment cycle (elevated CapEx) or a harvesting phase (declining CapEx). Management commentary in earnings calls and investor presentations often provides useful color on planned capital spending.