capital expenditure

(noun)

Funds spent by a company to acquire or upgrade a long-term asset.

Related Terms

Examples of capital expenditure in the following topics:

  • Free Cash Flow

    • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
    • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
    • Where Net Capital Expenditure (CAPEX) = Capex - Depreciation & Amortization and Tax Shield = Net Interest Expense X Effective Tax Rate
    • Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
    • Free cash flows = Cash flows from operations - Capital Expenditure ""

  • Times-Interest-Earned Ratio

    • EBITDA ignores changes in Working Capital (usually needed when growing a business), capital expenditures (needed to replace assets that have broken down), taxes, and interest.
    • Interest rates of working capital financing can be largely affected by discount rate, WACC and cost of capital.

  • The Goals of Capital Budgeting

    • The purpose of budgeting is to provide a forecast of revenues and expenditures.
    • Capital Budgeting, as a part of budgeting, more specifically focuses on long-term investment, major capital and capital expenditures.
    • The main goals of capital budgeting involve:
    • The real value of capital budgeting is to rank projects.
    • When a corporation determines its capital budget, it must acquire funds.

  • Interpreting Overall Cash Flow

    • One such ratio is that for capital acquisitions:
    • Capital Acquisitions Ratio = cash flow from operating activities / cash paid for property, plant and equipment
    • This sphere of cash flows also can be used to assess how much cash is available after meeting direct shareholder obligations and capital expenditures necessary to maintain existing capacity.
    • A common definition is to take the earnings before interest and taxes, add any depreciation and amortization, then subtract any changes in working capital and capital expenditure.
    • The free cash flow takes into account the consumption of capital goods and the increases required in working capital.

  • Selected Financial Ratios and Analyses

    • Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions.
    • The capital acquisition ratio reflects the company's ability to finance capital expenditures from internal sources.
    • A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than they are generating revenues.

  • Cash Flow Factors

    • This includes cash earnings plus changes to working capital.
    • Investment cash flows: Cash received from the sale of long-life assets or spent on capital expenditure, such as, investments, acquisitions, and long-life assets.

  • Defining Capital Budgeting

    • Capital budgeting is the planning process used to determine which of an organization's long term investments are worth pursuing.
    • It is to budget for major capital investments or expenditures.
    • Many formal methods are used in capital budgeting, including the techniques as followed:
    • Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital(WACC) to reflect the financing mix selected.
    • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.

  • Comparing Common Stock, Preferred Stock, and Debt

    • Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
    • Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas, bondholders have a creditor stake in the company (i.e., they are lenders).

  • Balance Sheet Analysis

    • Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period.
    • 3.2) Analysis of profitability refers to the analysis of return on capital, for example return on equity, ROE, defined as earnings divided by average equity.
    • Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

  • The Nature of Bonds

    • Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
    • Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (they are owners), whereas bondholders have a creditor stake in the company (they are lenders).