Capital Expenditure

Capital expenditure is the decision that shapes a company's next decade, and the ratio of capital expenditure to depreciation is the quickest read on whether it is expanding, holding steady or quietly shrinking. Spending well below depreciation for several years means the asset base is being consumed, which flatters current cash flow at the cost of future capacity. The line between capital expenditure and an expense is a judgement, and capitalising costs that should have been expensed is a classic way to inflate both profit and assets. Heavy capital expenditure is not itself good or bad; what matters is the return it eventually earns.