Capex vs. Opex

How Capex Works

Capital expenditure, or capex, refers to what a business spends to maintain, upgrade, or improve its long-term tangible assets such as property, plant, and equipment (PP&E). Capital expenditure is crucial for companies aiming to grow and maintain their operations. It can also be one of the main uses of cash flow in a company, particularly if a company is asset-heavy so requires annual maintenance, repair and expansion. With capex there may not be an immediate impact on the income statement.

How Opex Works

Operating expenses, or opex, are the costs associated with the core activities of a business. Many opex items are categorized as operating but all contribute towards the delivery of the final goods or services to customers.

Operating expenses can be further subdivided into COGS, which represents the costs directly related to the manufacturing of goods, and SG&A, which reflect overhead costs a company incurs to sell its products. These expenses are always reported in the company’s income statement, which provides.

What is the Difference Between Capital and Operating Expenditures?

Capex vs. Opex – The Key Difference

The key difference for investors is how both spending plans are reported. Operating expenses are expensed immediately through the income statement. This includes items such as rent payments, salaries, and utility bills which are all needed to ensure the smooth running of the core businesses.

Capex is capitalized and held on the balance sheet as it is considered an investment in the company’s future operations. Capital expenditure may include the repair or replacement of a factory roof, or improvements to manufacturing equipment. When analyzing a company’s performance, investors will be keen to assess capex spending, both on an absolute basis (i.e. what is the company doing to maintain or expand its core business) and relative to peers.

Download the free Financial Edge capex template to see how capex spending can be used in BASE analysis to forecast fixed assets such as property, plant and equipment (PP&E) on the balance sheet.

A well-run company should typically have growing sales and profits, whilst investing in upgrades to its fixed assets. A company that has a slowing capex spend (usually measured as a dollar figure or a percent of sales) may suggest that the cash flow is being directed elsewhere (e.g. servicing debt or returning cash to shareholders via dividends) and future growth may be impacted by this lack of investment.

Which is Better – Capex or Opex?

The answer to which is better, capex or opex, depends on the specific needs and goals of the business.

Capex is deemed better for long-term growth and expansion. Investing in assets that will provide a future economic benefit to the company, such as new equipment or facilities. However, it requires significant upfront costs and impacts cash flow.

Opex is better for maintaining day-to-day operations. It includes expenses that are necessary for the regular functioning of the business, such as salaries, rent, and utilities. These costs are expensed immediately and can be more flexible.

Ultimately, a balanced approach that considers both Capex and Opex is often the best strategy for a business to ensure both short-term efficiency and long-term growth.

What is an Example of Opex?

Operating expenses (opex) are costs that a company incurs in its regular business activities. Here are some examples of opex:

• Salaries and wages for non-production employees
• Rent for non-production facilities
• Utilities costs
• Office supplies
• Insurance costs
• Legal fees
• Advertising costs
• Travel costs
• Depreciation of fixed assets assigned to non-production areas

What is an Example of Capex?

Examples of capex are:

• Office buildings
• Land
• Equipment and machinery
• Computers
• Furniture
• Vehicles

How Are Capex and Opex Reported?

Capital Expenditures (capex) are reported on the balance sheet as assets. These expenditures are capitalized, meaning they are recorded as an investment in the company’s future operations. Over time, these assets are depreciated, and the depreciation expense is reported on the income statement.

Operating Expenses (opex) are reported on the income statement. These expenses are incurred during the regular course of business and are expensed immediately. This includes costs such as salaries, rent, utilities, and other day-to-day expenses.

Conclusion

Understanding the differences between Capital Expenditures (capex) and Operating Expenses (opex) is crucial for effective financial management. While capex focuses on long-term investments that drive growth, opex ensures the smooth running of day-to-day operations. A balanced approach that leverages both types of expenditures can help businesses achieve sustainable success.