Professional Documents
Culture Documents
Capital Expenditure (CapEx) Definition
Capital Expenditure (CapEx) Definition
By JASON FERNANDO
Locate the company's prior-period PP&E balance, and take the difference between the
two to find the change in the company's PP&E balance. Add the change in PP&E to the
current-period depreciation expense to arrive at the company's current-period CapEx
spending.
A ratio greater than 1 could mean that the company's operations are generating
the cashneeded to fund its asset acquisitions. On the other hand, a low ratio may indicate
that the company is having issues with cash inflows and, hence, its purchase of capital
assets. A company with a ratio of less than one may need to borrow money to fund its
purchase of capital assets.
For example, Ford Motor Company, for the fiscal year ended 2016, had $7.46 billion in
capital expenditures, compared to Medtronic which purchased PPE worth $1.25 billion for
the same fiscal year. CF-to-CapEx is calculated as follows:
$14.51 Billion
= 1.94
$7.46 Billion
$6.88 Billion
= 5.49
$1.25 Billion
It is important to note that this is an industry-specific ratio and should only be compared to
a ratio derived from another company that has similar CapEx requirements.
Capital expenditures are also used in calculating free cash flow to equity (FCFE). FCFE is
the amount of cash available to equity shareholders. The formula FCFE is:
FCFE = EP − (CE − D) × (1 − DR) − ΔC × (1 − DR)
where:
FCFE = Free cash flow to equity
EP = Earnings per share
CE = CapEx
D = Depreciation
DR = Debt ratio
ΔC = ΔNet capital, change in net working capital
FCFE = NI − NCE − ΔC + ND − DR
where:
NI = Net income
NCE = Net CapEx
ND = New debt
DR = Debt repayment
The greater the CapEx for a firm, the lower the FCFE.