Companies invest in equipment, machinery and buildings to increase production capacity and efficiency. Purchases and improvements to these assets are referred to as capital expenditures. Net capital expenditures for a period is the sum of fixed asset purchases and fixed asset improvements, less 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 minimum 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, but financial research can give companies an idea of what to shoot for. For example, USA TODAY reported 10 companies with increasing stock prices that spent between 5 and 17 percent of revenues on capital expenditures. Companies also can look at their own historical financial statements for the last few years to see what their own trends have been.
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