This post follows on from my essential financial statements series and opens my new series of the management of capital within a business. Capital expenditure is usually the largest single item in the investing section of the cash flow statement, and it is the first of the five ways a company can deploy its cash: reinvesting in the business itself.
Capital expenditure, almost always shortened to capex, is the money a company spends on long-lived physical assets such as factories, machinery, equipment, property, and vehicles. It is how a business builds and maintains the capacity to produce whatever it sells. Unlike a day-to-day running cost, capex does not appear as an expense on the profit and loss statement; instead it sits in the investing section of the cash flow statement, is recorded as an asset on the balance sheet, and is charged gradually against profit over the asset’s useful life as depreciation.
Capex is one of the most revealing numbers in a company’s accounts, because it sits at the junction of three things an investor cares about: how much cash the business actually generates, how fast it can grow, and how good its underlying economics are. The single most useful skill in reading it is learning to split one capex figure into two very different types.
To make this concrete, take George’s Law Updates Tech, the fictional CPU business from my financial statements series. In 2026 it reports total capex of £55,000,000. On the face of it that is just one line on the cash flow statement, but management discloses that it breaks down as follows.
George’s Law Updates Tech: capital expenditure, 2026
| Type of capex | Amount | Purpose |
|---|---|---|
| Maintenance capex | £25,000,000 | Replacing worn fabrication equipment to hold output |
| Growth capex | £30,000,000 | A new production line to expand capacity |
| Total capex | £55,000,000 |
Why does this split matter so much? Because the two halves tell opposite stories. GLU Tech generated £125,000,000 of operating cash flow in the year. On the common definition, free cash flow is operating cash flow minus all capex: £125,000,000 less £55,000,000 leaves £70,000,000. But a sharper view subtracts only the maintenance capex, the spending the company cannot avoid: £125,000,000 less £25,000,000 leaves £100,000,000. That second figure is closer to the true ongoing cash-generating power of the business, because the £30,000,000 of growth capex is a discretionary investment in the future rather than a cost of standing still.
The two types of capex
Maintenance capex is the spending required just to keep the business running at its current level: replacing equipment as it wears out, refreshing vehicles, repairing infrastructure. It is effectively mandatory, because a company that stops spending it will slowly watch its output and competitiveness decay.
Growth capex is the spending a company chooses to make in order to expand: a new factory, additional production lines, entry into a new market. It is discretionary, tied to expansion plans, and it is only worth making if the new capacity earns a return above the company’s cost of capital. Confusing growth capex with maintenance capex is one of the most common and costly mistakes in valuation.
Putting a capex number in context
A capex figure means very little on its own; it has to be measured against something. Three quick ratios do most of the work.
Capex as a percentage of revenue shows how capital-hungry the business model is. A software business might run at a low single-digit percentage of sales, while a telecoms operator or a utility can run many times higher. This tells you how much a company must spend simply to participate in its industry.
Capex against depreciation is a rough check on whether a company is investing for growth or merely treading water. If capex runs well above depreciation, the company is likely expanding its asset base; if it sits consistently below depreciation, it may be under-investing and quietly running its assets down.
Capex against operating cash flow shows how much of the cash the business produces is being ploughed straight back in, and therefore how much is left over for debt repayment, dividends, and buybacks.
The most commonly confused terms explained
Capex against opex = capex (capital expenditure) buys long-lived assets and is spread across many years through depreciation; opex (operating expenditure) is the day-to-day running cost, such as wages and rent, and is charged against profit immediately. The same pound spent looks very different depending on which bucket it falls into.
Maintenance against growth capex = maintenance capex keeps existing operations running and is essentially unavoidable; growth capex funds expansion and is discretionary. The first is a cost of survival, the second an investment in the future.
Free cash flow = the cash left after the capex needed to sustain the business. Whether you subtract all capex or only maintenance capex changes the figure significantly, which is precisely why the split matters.
Depreciation = the accounting method that spreads the cost of a capital asset across the years it is used, so that past capex continues to show up in the profit and loss statement long after the cash itself has left the business.
What does a company’s capex tell an investor?
- Where the business is in its life cycle
A company whose capex is mostly growth capex, running well above depreciation, is usually young and expanding. A company whose capex is almost entirely maintenance, sitting at or below depreciation, is usually mature with limited room to grow. The mix is a quiet readout of how much future growth management genuinely expects.
- Whether reported free cash flow can be trusted
This is the one that catches people out. A company can flatter its free cash flow for a year or two by quietly under-spending on maintenance capex; the cash looks healthy, but it is borrowing from the future, because the neglected assets will eventually have to be replaced. Comparing capex to depreciation over several years helps spot a company that is living off its own infrastructure.
- How good the underlying business is
The most attractive businesses are those that can grow without swallowing ever-larger amounts of capex, because that leaves more cash for shareholders and produces high returns on the capital employed. A business that must spend more and more simply to stand still, or to grow only modestly, is a far less appealing home for an investor’s money, however fast its revenue rises.
There is also a point here for lawyers and auditors. The line between capex and opex is not always obvious, and it can be abused: recording ordinary running costs as capital expenditure moves them off the profit and loss statement and flatters reported earnings. This is exactly what WorldCom did in the early 2000s, capitalising billions of dollars of operating costs to manufacture profits, in what became one of the largest accounting frauds in history. It is one reason auditors pay close attention to how a company draws the line.
“We still love a business that takes very little capital, and earns high returns.”
Warren Buffett
Table of Contents
Sources
“Growth Capex vs. Maintenance Capex,” Wall Street Prep: https://www.wallstreetprep.com/knowledge/growth-capex-vs-maintenance-capex/
“Growth CapEx vs Maintenance CapEx: What’s the Difference?,” Valuation Master Class: https://valuationmasterclass.com/growth-capex-vs-maintenance-capex/
“Understanding Free Cash Flow Series: Growth vs. Maintenance Capex,” GuruFocus: https://www.gurufocus.com/news/137623/understanding-free-cash-flow-series-growth-vs-maintenance-capex
“Maintenance vs Growth Capital Expenditures: A Quick Primer,” Investing for Beginners: https://einvestingforbeginners.com/maintenance-vs-growth-capital-expenditures-a-quick-primer/
Written by George Hocking
Leave a Reply