Capital Expenditures (CapEx)

Capital expenditures, or CapEx, are investments a company makes in long-term assets — property, buildings, equipment, technology, and infrastructure. Unlike operating expenses that are consumed immediately, capital expenditures create or improve assets that will generate value over multiple years.

CapEx is subtracted from operating cash flow to calculate free cash flow. A company with strong operating cash flow but extremely high CapEx may produce little or no free cash flow, which directly affects its valuation in DCF analysis.

Maintenance vs Growth CapEx

Maintenance CapEx is the minimum spending needed to keep existing assets operational — replacing worn equipment, maintaining buildings, upgrading technology. Growth CapEx is spending on new assets that expand capacity or enter new markets.

This distinction matters for valuation. Maintenance CapEx is a recurring cost that reduces free cash flow permanently. Growth CapEx is an investment that should generate returns over time. A company spending heavily on growth CapEx may have temporarily depressed free cash flow but higher future earnings potential.

Capital-light businesses like software companies require minimal CapEx relative to revenue, allowing most operating cash flow to pass through as free cash flow. Capital-heavy businesses like airlines, telecom, and manufacturing require substantial ongoing CapEx, which permanently reduces the cash available to shareholders.