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.
