It is total financial outlay for purchasing, maintaining the fixed assets base of the company. This type of expenditure is a major financial decision for a company and must be officially approved at annual shareholders meeting or BODs.

Effect on Balance sheet

The capital expenditure augments the non-current asset, which is capitalized on the asset side of the balance sheet.

Effect on Income statement

The costs are amortized through profit and loss statement.

 

Effect on Cash flow statement

There will be reduce from the cash flows on investing activities.

 

How Capital expenditure is different from other expenses?

 

How to use of Capex?

CFO to capex ratio is very important ration used by financial analysts.

If the ratio is greater than 1then it could mean that company’s operations are generating cash; sufficient to fund its asset acquisitions. On the other side, if the ratio is less than 1, it could mean that the company may need to borrow money to fund its purchase of capital assets.

 

Capital expenditure is used to calculate the Free Cash flow for the firm.

Free cash flow for firm: EBIT (1- Tax Rate)+ Depreciation-Change in Net working capital-Capex

Calculating the Free Cash flow for the equity holders

Free cash flow for equity= net income+ Depreciation- Change in Net working capital-Capex+New  Debt Raised- Debt Repayment.