Capital Expenditure (CapEx) – which is capital expenditure

Capital expenditure (CapEx) represents the finance that companies invest in fixed assets or assets to improve their operating capacity, increase efficiency or expand their business. This includes the purchase, upgrade or maintenance of physical assets such as buildings, machinery, technology or infrastructure.

CapEx is a key metric for investors evaluating a company’s financial stability and growth potential. High capital expenditures often signal a company’s development plans, while low expenditures may indicate stabilization or decline.

What is Capital Expenditure (CapEx)?

Capital expenditure (CapEx) represents funds that a company invests in the purchase, maintenance or improvement of its fixed assets. These assets include physical assets such as buildings, machinery, technology, land or infrastructure that are used to provide for the future operational capacity or growth of the business.

CapEx is a key indicator for investors and management because it signals how a company is investing in its long-term development.

Types of capital expenditure

• Investment in new assets: purchase of new equipment, buildings, machinery or technology to expand the business.
• Upgrading of existing assets: expenditure to improve or renovate an asset in order to improve its performance or extend its useful life.
• Maintenance: expenditure on repairs that ensure the long-term functioning of existing assets.

Why is CapEx important?

Capital expenditure (CapEx) is an essential part of any company’s long-term planning and development, as it enables companies to secure their future, increase efficiency and competitive advantage. Investing in fixed assets such as new technology, machinery, buildings or infrastructure helps companies expand production capacity, enter new markets and keep pace with growing demand. Without regular capital expenditure, many companies would not be able to grow or respond to changing market conditions.

In addition to supporting growth, CapEx has a major impact on improving operational efficiency. Upgrading old equipment and implementing new technologies reduces operating costs, increases productivity and minimises the risk of breakdowns or downtime. This aspect is particularly key in industries where the efficient operation of infrastructure directly impacts profitability.

CapEx also plays an important role in signaling a company’s financial health to investors. High capital expenditures may indicate that a company has ambitious plans for growth, while low investment may signal stagnation or decline. At the same time, regular maintenance and upgrading of existing assets show that the company recognises the importance of maintaining its operational capacity and long-term sustainability.

For proper financial planning, CapEx is also important from a cash flow perspective. Companies need to ensure that their investments are timed in a way that does not disrupt current operations while supporting future growth. The balance between capital expenditure and operating costs is therefore crucial.

Overall, CapEx is a fundamental pillar of business strategy that enables companies to not only survive but also thrive in a dynamic and competitive environment. Its importance lies in its ability to support long-term growth, increase efficiency and attract investors looking for companies with a clear vision for the future.

The importance of CapEx for companies and investors

• For firms: capital expenditure is essential to ensure growth, maintain competitiveness and increase productivity.
• For investors: the CapEx indicates how the company plans to grow and what its financial priorities are. Higher CapEx often indicates growth plans, while lower spending can signal stagnation.

How to calculate Capital Expenditure (CapEx)?

Capital expenditure (CapEx) can be calculated from a company’s financial statements, specifically the balance sheet and income statement. To calculate it, we need data on fixed assets (intangible and tangible) and depreciation for the period. The CapEx calculation is simple and helps to understand how much the company has invested in its fixed assets.

CapEx = (value of fixed assets at the end of the period – value of fixed assets at the beginning of the period) + depreciation for the period

Examples of capital expenditure

• Purchase of a new production line to increase production.
• Construction of office space or storage units.
• Modernization of the company’s IT infrastructure.
• Purchase of land for future business expansion.

CapEx and tax optimisation

Capital expenditures (CapEx) have a significant impact on a company’s tax liability as they can be used to optimise the tax burden. Although capital expenditures themselves are not normally directly deductible from the tax base in the year in which they are incurred, their impact on tax expense is most often through depreciation and amortization.

How does CapEx affect taxes?

Amortisation of capital expenditure

• Capital expenditure on the purchase or modernisation of fixed assets is allocated to depreciation, which is charged over the useful life of those assets.
• Depreciation is an annual cost that is included in expenses that reduce the tax base.
• For example, if a company invests €100,000 in a new machine with a depreciation period of 10 years, an annual depreciation of €10,000 will reduce the company’s taxable income for 10 years.

Accelerated depreciation options

• In many countries, including Slovakia, legislation allows the use of accelerated depreciation. This means that a company can apply higher depreciation in the first years of use of the asset, which reduces the tax base faster.
• This method helps companies optimise cash flow by deferring part of the tax liability to later years.

Deduction of VAT

• If the company is a VAT payer, it can claim a VAT deduction on capital expenditure. This significantly reduces the real cost of acquiring the asset.
• For example, if a company buys a machine for €100,000 with 20% VAT, it can claim a deduction of €20,000, reducing the effective price to €80,000.

Benefits of investment incentives

In some cases, capital expenditure may be linked to tax incentives such as tax holidays, rebates or grants. These incentives are often available in sectors such as research and development, energy efficiency or investment in manufacturing.

Tax optimization strategies using CapEx

• Timing of investments: planning the timing of investments is key. For example, making CapEx at the end of the tax year can help to start depreciation earlier, reducing the tax base in the current year.
• Choice of depreciation method: the company can choose between straight-line and accelerated depreciation depending on its financial needs and tax strategy. Accelerated depreciation is popular for companies that need to reduce their tax burden immediately.
• Investment in technology and innovation: in many countries, spending on technological innovation is supported by additional tax breaks. Companies can thus effectively reduce their tax liability.
• Leasing versus buying: if capital expenditure is not optimal from a cash flow perspective, companies can use leasing, which can be accounted for as an operating expense (Opex) and directly deducted from the tax base.

The difference between CapEx and Opex

It is important to distinguish between capital expenditure (CapEx) and operating expenditure (Opex):

• CapEx: expenditure on fixed assets that are depreciated over a number of years. An example is the purchase of new production equipment.
• Opex: expenses for the day-to-day running of the business, such as wages, rent or energy costs.

How to analyze CapEx in investment decision making?

When making investment decisions, capital expenditure (CapEx) analysis is key to understanding the financial impact and return on investment. The first step is to evaluate whether the planned investment is aligned with the company’s strategy and supports its long-term objectives, such as growth, efficiency or entry into new markets. Next, the expected return on investment (ROI) must be analyzed, comparing the cost with the expected benefits, such as increased revenue, reduced costs or improved productivity.

It is also important to consider the availability of finance and the impact of the investment on cash flow. Companies need to ensure that CapEx does not undermine their liquidity and also evaluate possible sources of funding, whether from equity, debt or equity issuance. Risks such as cost overruns, unforeseen changes in the market or regulatory constraints must also be considered in the analysis.

Taking depreciation into account is another important aspect as it affects profitability and tax costs in the future. Overall, a CapEx analysis should include a comprehensive view of the financial and strategic implications, with the investment being economically justified and contributing to the long-term success of the business.