Maintenance Versus Growth Capital Expenditure
Capital expenditure, or capex, is money spent on long-lasting assets. Some of it simply keeps the lights on; some of it builds future growth.
Why this matters for beginners
Free cash flow subtracts all capex, but a company spending heavily on growth may be far more profitable underneath than its free cash flow suggests. Learning objectives: split capex into its two kinds, estimate maintenance capex, and judge owner earnings.
Main explanation
Maintenance capex replaces worn-out machines, trucks or servers so the business can keep producing at today's level. Without it, the business slowly shrinks.
Growth capex adds new capacity: new stores, factories or data centres. It should produce extra revenue later.
Companies rarely report the split. A rough starting estimate is depreciation, the yearly accounting charge for wearing out assets, because it approximates what is needed to replace them.
Example: operating cash flow 500, total capex 300, depreciation 120. Free cash flow is 200. If maintenance capex is about 120, cash available before growth spending is about 380.
Inflation can make maintenance more expensive than depreciation suggests, because replacement assets cost more than the originals. Be conservative.
Growth capex only creates value if new investments earn good returns. Rising capex with flat revenue is a warning.
Example using a real company
Deere spends on factories and equipment every year. Some replaces existing plants, while investment in precision-agriculture technology aims at future growth.
- →Cash flow 500, capex 300, depreciation 120: free cash flow 200, estimated owner cash about 380.
- →Retailer opening 50 new stores: much of its capex is growth, not maintenance.
Common beginner mistakes
- ✕Treating all capex as an unavoidable cost.
- ✕Assuming growth capex will automatically pay off.
- ✕Using depreciation as maintenance capex without considering inflation.
Key terms
- Capex
- Money spent on long-lasting assets such as buildings and equipment.
- Maintenance capex
- Spending needed to keep current capacity running.
- Growth capex
- Spending that adds new capacity for future revenue.
Key takeaways
- 01Not all capex is equal: some sustains, some grows.
- 02Depreciation is a rough guide to maintenance capex.
- 03Growth capex must earn good returns to add value.
Check yourself
- 01What is maintenance capex?
- 02Operating cash flow 500, capex 300, maintenance capex about 120. Roughly how much cash is there before growth spending?
- 03What is often used as a rough estimate of maintenance capex?
- 04Why can heavy growth capex make free cash flow look weaker than the business really is?
- 05Capex keeps rising but revenue is flat. What might that suggest?
Try the concept on a real company
Open a capital-intensive company in the Analyzer and compare its capex with its depreciation.
Educational examples only. Not buy or sell recommendations.