What is CAPEX?

Malcolm Tatum

Short for capital expense, CAPEX refers to any capital expenditures that are used to acquire physical assets. The assets acquired as a result of this capital spending may be in the form of property such as land or buildings, as well as equipment for an office or to set up a manufacturing floor. Along with being related to the acquisition of new assets, CAPEX can also be associated with the decision to upgrade physical assets by making improvements or otherwise refurbishing the property or equipment.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Understanding the amount of CAPEX that is involved in acquiring these types of assets, or in refurbishing existing ones, can be very helpful when the task will require borrowing funds. Lenders often look at the actual amount of the capital expense involved, as well as whether the borrower wants to loan to purchase new equipment or to upgrade existing assets. Depending on the strategy, a lender may determine that lending money to upgrade outmoded equipment, or attempt to improve property that will not appreciate significantly in value as a result, may be a bad risk. Because this set of circumstances could directly impact the ability of the borrower to repay the loan, a lender may choose to deny the application.

At the same time, a lender may see CAPEX as an excellent reason to lend money and find the strategy of the borrower to contain potential for enhancing both the reputation and the financial resources of the company, once the acquisitions or upgrades are completed. When this is the case, lenders often are willing to extend the loans with very favorable terms.

When calculating the CAPEX associated with any type of property acquisition or equipment replacement, it is a good idea to make sure the transaction will be able to pay for itself in a reasonable period of time. Generally, the anticipation is that the investment will increase productivity in a manner that allows the same amount of goods to be produced more quickly or at lesser expense. In both scenarios, this will mean an increase to the gross profit of the company, once the CAPEX has been settled in full.

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