When evaluating a business to purchase or invest in do not forget about capital expenditures – more commonly known by the acronym CAPEX. CAPEX refers to the funds used by a company to acquire, upgrade, or improve fixed assets such a property, plant, and equipment. CAPEX also includes assets that improve software and technology of the company. CAPEX is used on assets that generate income and are expected to provide a benefit over a long-term time period of a year or more.
Here are some common examples of CAPEX.
- Property: Purchasing or constructing buildings or facilities to be used for business purposes, such as offices, manufacturing plants, warehouses, or retail spaces.
- Equipment: Investing in machinery, vehicles, tools, or other equipment needed to produce goods or services. Examples include buying a new printing press for a newspaper company or a new MRI machine for a hospital.
- Technology: Investing in software, hardware, and other technology infrastructure to improve business processes, increase efficiency, or enhance customer experience. For example, upgrading a company’s website or investing in a new accounting software.
- Intangible assets: Acquiring intangible assets such as patents, copyrights, or trademarks that have long-term value to the business.
- Research and Development: Funding research and development (R&D) projects to develop new products, improve existing ones, or discover new technologies.
- Infrastructure: Investing in public infrastructure projects such as roads, bridges, and public transportation systems that can benefit the business and the wider community.
Therefore, by nature these expenses do not show up on an income statement. On an income statement, a company reports its revenue and expenses over a specific period, usually a quarter or a year. The expenses reported on the income statement include both operating expenses (OPEX) and non-operating expenses, such as interest expenses and taxes. CAPEX is not included in the expenses section of the income statement because it is a long-term investment that is expected to benefit the company over several years. Instead, CAPEX is a cash outflow reflected on a company’s cash flow statement but not directly on the income statement.
CAPEX will be shown as an increase to fixed assets on a company balance sheet and will be depreciated over time. Therefore, when evaluating a business, capture the CAPEX number and use that to reduce the net income of the business to get an accurate picture of that company’s profits.
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