Capital Expenditure

Capital Expenditure (English: Capital Expenditure), referred to as Capex, refers to the new assets purchased by a company in order to maintain current competitiveness or create more possible future revenue, that is, to obtain or extend the service life of fixed assets.

The formula for capital expenditures is:

Capital expenditure = Total investment in new fixed assets in the current period

Fixed assets refer to long-term tangible or intangible assets used by a company for production, supply, leasing or management, such as land, buildings, equipment, vehicles, patents, etc.

Capital expenditures can be divided into the following types:

Maintenance capital expenditure: refers to capital expenditure used to maintain existing production capacity or service levels, such as replacing damaged equipment or making necessary repairs.

Expansion capital expenditure: refers to capital expenditure used to increase production capacity or service levels, such as building new factories or adding new equipment.

R&D capital expenditure: refers to capital expenditure used to develop new products or services, such as investing in R&D projects or obtaining patent rights.

Capital expenditures can be queried from the company's financial statements, mainly in the following ways:

Query from the cash flow statement: The cash flow statement reflects the company's cash receipts and expenditures during a certain period. The investing activities section lists the company's cash flow on fixed assets, which is capital expenditures.

Query from the income statement: The income statement reflects the company's revenue and expenses during a certain period. The depreciation and amortization expense section lists the company's depreciation and amortization expenses on fixed assets, which is related to capital expenditures.

Look from the balance sheet: The balance sheet reflects a company's assets and liabilities at a specific point in time. The fixed assets section lists the original cost and accumulated depreciation of the fixed assets owned by the company, which is also related to capital expenditures.

Capital expenditures affect depreciation because depreciation is the process by which fixed assets decrease in value over time. The formula for depreciation is:

Depreciation = the annual portion of a capital expenditure spread over its future useful life

During the accounting useful life of the fixed asset, the total depreciation will be equal to the net capital expenditure (for example: depreciation of 0,000 yuan per year for 5 years, the total is equal to capital expenditure of 0,000 yuan).

Therefore, when a company increases or decreases capital expenditures, it affects its depreciation expense each year in the future. Generally speaking, an increase in capital expenditures will increase future annual depreciation expenses, and a decrease in capital expenditures will decrease future annual depreciation expenses.