Capital expenditure

Money spent acquiring or improving long-lived assets such as buildings, machinery and equipment. Shown in the investing section of the cash flow statement rather than as a cost on the income statement.

Example

Northgate spent 400,000 on equipment against a depreciation charge of 180,000 - investing at 2.22 times the rate its assets are being consumed.

Important

Some capital spending is discretionary expansion and some is the price of continuing to exist. Spending far below the depreciation charge year after year means a business is quietly consuming itself.

Related terms

  • Depreciation and amortisation — The accounting charge that spreads the cost of a long-lived asset across the years it is expected to be used - depreciation for physical assets, amortisation for intangible ones.
  • Free cash flow — Operating cash flow less capital expenditure - what is left after the business has funded both its trading and the assets it needs to keep running.
  • Cash flow statement — The statement explaining how the bank balance moved over a period, split into cash from operating the business, cash spent on or received from long-term assets, and cash raised from or returned to lenders and owners.

Lessons that explain it

  • The cash flow statement: what actually moved — The statement that cannot be authored the way the other two can, because at the end of it there is a bank balance that either matches or does not. It is where a profitable year reveals whether it was also a solvent one. (12 min)
  • When the cash and the profit disagree, believe the cash — Most accounting problems show up as a widening gap between reported profit and cash collected. A few ratios, tracked over time, catch the common ones. (12 min)
  • Appraising one property: the numbers, the condition, the tenant and the exit — Seven checks on one specific building. The two that decide most outcomes - the deduction list and whether the income covers the borrowing - are the two that never appear in a listing. (14 min)

All 578 terms in the Investing glossary