Companies invest in equipment, machinery and buildings to increase their production capacity and efficiency. Purchases and improvements to these assets are referred to as capital expenditures, because they require a significant outlay that can't be covered by ordinary operating revenue. Net capital expenditures for a period are calculated by adding up fixed asset purchases improvements for that period, then subtracting any fixed asset sales.
What's In Capital Expenditures
Capital expenditures – also known as CAPEX – are purchases of long-lived physical assets expected to last more than one year, or an improvement or upgrade to a fixed asset. Purchases of machines, specialized equipment, aircraft, vehicles, buildings and upgrades to factories all are examples of capital expenditures. Service-oriented business, like law firms, accounting firms and PR agencies, tend to have minimal capital expenditures. Equipment-intensive businesses like telecommunications, railroads, airlines and oil companies, have more capital expenditures.
Calculating Capital Expenditures
Net capital expenditures for the year equals purchases of new fixed assets plus upgrades to existing fixed assets minus the sale of any fixed assets. You can also calculate capital expenditures over a year with comparative financial statements. First, subtract the amount of last year's net fixed assets from this year's figure, excluding any intangible assets listed. Next, subtract last year's balance of accumulated deprecation from this year's balance. Add the increase in fixed assets to the increase in accumulated depreciation to calculate net capital expenditures for the period.
Compared to Revenue
It's difficult for a business to know how much it should invest in capital expenditures. One benchmark it can use capital expenditures as a percentage of revenue. This measures how much of its revenue a business puts towards capital expenditures. To calculate the ratio, divide capital expenditures by revenue. For example, if a business had $10,000 in net capital expenditures and $100,000 in revenue for the year, capital expenditures are 10 percent of total revenues.
Analyzing Capital Expenditures
A business can analyze its capital expenditure trends by comparing itself to external benchmarks and analyzing year-over-year trends. Capital expenditure rates vary wildly depending on the industry and the economy, but financial research can give companies an idea of what to shoot for. For example, Reuters reported that in the first quarter of 2018, capital expenditures in Fortune 500 companies rose about 21 percent over last year. Companies also can look at their own historical financial statements for the last few years to see what their own trends have been.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.