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Definition: When an expenditure is incurred to build an asset so that the asset provides benefits for more than a year, then such an expenditure is called “capital expenditure.”
When a government or a company spends money to build an asset for long-term benefits, then such an expenditure is called capital expenditure. Suppose a government is spending on building an airport. This airport may provide benefits or returns for decades. Therefore, such an expenditure is called capital expenditure. Similarly, if a company is investing in building a new plant, the new plant will manufacture products for years to come. Therefore, it will be considered as capital expenditure. Typically, when a company incurs capital expenditure, it’s deemed to be in an expansion phase, which means it’s trying to improve its production capacity. If a company is increasing its capital expenditure, it means it will be manufacturing more in the future. Therefore, we should analyse whether there’s a market for those many goods in the future. We should also examine how a company funds its capital expenditure. If it is generating enough cash flows to fund its capital expenditure, it’s fine. However, if it is borrowing excessively to fund its capital expenditure, then that may not be sustainable.
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