Definition:

A capital expenditure is a significant outlay of funds by a company to acquire or improve long-term assets, such as property, plant, and equipment (PP&E). These expenditures are expected to provide benefits to the company over a period of more than one year.

Key characteristics of capital expenditures:

  • Long-term assets: Capital expenditures are investments in long-term assets.
  • Depreciation or amortization: Capital expenditures are typically subject to depreciation or amortization, which is the process of allocating their cost over their useful life.
  • Financial statements: Capital expenditures are reported on the balance sheet as property, plant, and equipment.
  • Cash flow: Capital expenditures can have a significant impact on a company’s cash flow, as they require a large upfront investment.

Why are capital expenditures important?

  • Growth: Capital expenditures are essential for businesses to grow and expand their operations.
  • Efficiency: Investing in new equipment or facilities can improve efficiency and productivity.
  • Competitive advantage: Capital expenditures can help a company to gain a competitive advantage in the marketplace.

However, it’s important to note that capital expenditures can be a significant investment, and they should be carefully evaluated to ensure that they are worthwhile.

In essence, a capital expenditure is a significant outlay of funds by a company to acquire or improve long-term assets, and it’s a crucial component of a company’s growth and development.