Calculate Your Capital Expenditures With This Helpful Guide
May 12, 2019
Capital expenditures (Capex) are the expenses made on future assets. Here, we will explain how to calculate capital expenditures.
The total rental and non-rental gross capital expenditures for United Rentals Inc. for the year 2017 was $1.889 billion, as compared to the total rental and non-rental gross capital expenditures for the year 2016, which was $1.339 billion.
Every company uses two kinds of expenses to help easy accounting and feasibility in business operations. These expenses are broadly categorized as operational expenditures (Opex) and capital expenditures (Capex).
The former includes all the money that is spent on the current operations of the business, i.e., whatever money is needed for running the company, for example, rent, worker's wages, utilities, raw materials, etc.
Capex, on the other hand, includes all the money that is spent on buying assets that will be for the future of the company. This also includes the money that is spent on improving the quality of an already existing asset.
There is no standard capital expenditures formula for calculation, as it varies from one business to another. However, a general outlook is presented here.
As already mentioned, Capex involves expenses to buy assets for tomorrow.
It is classified into two types, the first one of which involves spending money in order to develop the shelf-life of the existing assets, and the second one involves actually buying assets for future use.
This former amount is always added in the income statement.
The company uses this amount in order to expand their operations.
Examples of long-term assets include property, equipment, machinery, apparatus, patents, etc.
Steps to Calculate
Obtain the financial statements of the company for the last two years.
List down the net amount of the fixed assets at the end of the preceding year and at the end of the current year. While doing so, you need to disqualify the intangible assets as well as those obtained from acquisitions, during that accounting period.
Subtract the net amount of the fixed assets at the end of the preceding year from the net amount of fixed assets at the end of the current year.
List down the accumulated depreciation at the end of last year and current year. This value should not include any depreciation or amortization of the assets acquired.
Subtract the latter from the former.
Add the total depreciation to the change in assets. There, you have the amount of capital expenditures for the accounting period.
Let's say, you own a computer company. You have sufficient systems, yet you do not have any backup in case any of the existing systems fail.
In that case, if you invest in 10 new computer systems, this amount you spend is listed as a capital expenditure.
Your company's book value is automatically increased by that amount and is recorded in the company's income statement.
Now, since this is an electronic item, it depreciates with time, and over how much ever time it depreciates (determined by the method the company uses), the value is entered as an annual depreciation value.
Assume that you buy some furniture for your workplace, for USD 30,000.
If you believe the useful life of the furniture to be around 5 years, you will need to assume USD 6,000 as a depreciation value.
The amount used for the purchase is expensed in the income statement over time.
The depreciation leads to reduced profit and taxation.
Things to Remember
Though already mentioned earlier, it is vital to remember that there are 2 types of Capex - the expansion expenditures and the maintenance expenditures.
The maintenance expenditures are expensed in the balance sheet.
Capex cannot be deducted during the accounting period. Over time, the assets undergo depreciation and amortization.
Since the expenses are entered on the income statement, there is a depreciation in the asset value, which leads to a lowered profit and a tax saving.
While comparing companies with regards to Capex, always keep in mind that this amount is different for different companies, and the comparison should be made between industries having a common platform.
Capex must be capitalized during the accounting phase, in the balance sheet within the asset's shelf life.
Capex, when recorded on the balance sheet, is termed as a capital outlay.
Capex is used in the cash flow to capital expenditures ratio, which helps business analysts determine the company's capability to finance future projects.
Every company needs to set up a minimum capitalized value.
Sometimes, some assets are expensed irrespective of whether they come under Capex or not. This is done in order to avoid recording details of the depreciation of minimum value assets.
Capital expenditures are crucial for the financial stability of the company. They are always spent on the tangible assets, like buildings and machines. How much of an amount is set aside for Capex is dependent on the current situation of the company. Analysis of Capex is an important phase to be considered while increasing the efficiency of the company.