CAPEX (capital expenditure)

CAPEX (capital expenditure) refers to the amounts a company spends to acquire, renew or expand its tangible and intangible fixed assets: machinery, buildings, IT equipment, software or patents. Unlike operating expenses, capex is not fully charged to the income statement in the year it is incurred: it is capitalised on the balance sheet and then spread over time through depreciation and amortisation.

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A distinction is drawn between maintenance capex, needed to keep the production tool in working order, and growth capex, aimed at increasing capacity. This distinction is decisive in valuation: in a Discounted cash flow (DCF) method model, only maintenance capex should be deducted to estimate the long-term normalised cash flow, otherwise value is understated. In cash flow analysis, capex is subtracted from operating cash flow to arrive at Free cash flow.

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By way of illustration, an industrial SME generates 4 MCHF of EBITDA and invests 1.5 MCHF per year, of which 0.6 MCHF to renew its machines and 0.9 MCHF for a new production line. In valuation, only the 0.6 MCHF of maintenance capex is deducted from the normalised flow: retaining the full 1.5 MCHF would unduly depress the company's value.

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For an SME owner in France or Switzerland preparing a sale, documenting the nature and recurrence of capex is essential: a buyer will seek to isolate exceptional investments from structural spending in order to assess the cash genuinely available after funding operations, a core focus of business valuation.