CapEx
Capital Expenditure — spending on physical assets (property, equipment, technology) intended to be used over multiple years, as distinct from operating expenses consumed within the current period.
Behind the balance sheet · 7 of 17Next: Depreciation & Amortisation (D&A)
Why CapEx matters in interviews
Capital expenditure is the line that separates EBITDA from actual cash generation, so interviewers use it to test whether you understand why a high-EBITDA business can still be a poor investment. In an LBO context it is decisive: capex competes directly with debt service for the same cash.
How it works in practice
Capex is spending on long-lived physical or intangible assets — property, plant, equipment, technology — that is capitalised on the balance sheet and depreciated over its useful life, rather than expensed immediately like operating costs.
It splits into maintenance capex (what the business must spend to keep operating at current capacity) and growth capex (spending to expand). Only maintenance capex is genuinely non-discretionary, and separating the two is a standard diligence exercise because it determines true free cash flow.
The accounting path matters: capex is a cash outflow in investing activities in the period spent, but hits the income statement only gradually as depreciation. That mismatch is exactly why free cash flow subtracts capex and adds back D&A.
As a rule of thumb, in a steady-state business capex approximates depreciation. A company persistently spending well below depreciation is under-investing and borrowing from its future.
What candidates get wrong
- Treating all capex as discretionary in an LBO. Cutting maintenance capex flatters near-term cash flow and damages the asset — buyers and lenders look straight through it.
- Forgetting that capitalised software development and capitalised leases are capex in substance even where the presentation differs.
- Assuming capex equals depreciation in a growing or capital-intensive business. It usually does not, and the gap is the whole story.
CapEx: frequently asked questions
What is the difference between capex and operating expenses?
Capex buys assets used over multiple years and is capitalised on the balance sheet then depreciated over time; operating expenses are consumed within the current period and hit the income statement immediately. The cash goes out at the same moment in both cases — the difference is purely how and when it is recognised in earnings.
What is the difference between maintenance capex and growth capex?
Maintenance capex is the spending required to sustain current operations and capacity — replacing worn equipment, renewing systems. Growth capex funds expansion: new sites, added capacity, new product lines. Only maintenance capex is truly non-discretionary, so it is the version subtracted when estimating sustainable free cash flow.
Why does capex matter so much in an LBO?
Because it competes with debt service for the same cash. A leveraged business with heavy capex requirements has less cash available to amortise debt, which reduces deleveraging and therefore equity returns. It is a core reason sponsors favour asset-light, low-capex businesses.
Practise it
The schedule a real model uses: one layer per capex vintage, each depreciating over its own useful life, with the charge as the column total. Switch the life, switch to an accelerated method, or type over a capex year and watch the stack move.
Open Depreciation Waterfall, free, 10 minWhere CapEx comes up
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