Capex

CFA Level I
#1

Please explain the following two statements.

This statements are from the last chapter of FSA…

  1. Capex divided by the sum of gross PPE and capex can indicate what percentage of the asset base is being renewed through new capital investment.

  2. Capex can be compared to asset disposals to gain some insight on growth of the asset base.

#2

  1. Capex is capital expenditure, which means the amount of money that is spent on capital assets (property, plant and equipment) each period, usually a year. Dividing that by gross PPE would give you the percentage of how much is spent each period.

  2. I’m going to take a guess at this one. Capex – asset disposals = growth of asset base. This is saying how much money a company is spending on PPE compared to what they are getting rid of. So if they spend more than they dispose, then the asset base will grow and vice versa.

#3

Thanks hei.so …

but this concepts are just getting over the head…

Would u mind explaing thru examples…

#4

It’s been awhile since i’ve looked at that section but think of CAPEX in two peices:

The first peice is an investment in lets say a new machine for expanding your business. A new investment requires a large up front capital expenditure that is depreciated over its useful life

Second peice is sustaining this investment. You would be simply refreshing machines through maitenance or updates. basically added back the depreciation you’ve taken against the asset when this asset has almost been “used up”. Machines do not last forever

lets say you have $100 in PPE, with $10 deprecation per quarter with accumulated deprecation of 30 (net 70 assets in PPE). If the company spends $40 in capex in this quarter, the revised PPE would be 140 less accumulated depcreation of 40 = $100. This implies no additional assets were added.

To address your #1 in your first post, if they spent $40 against the PPE of 100, it implies they have refreshed 40% of their asset base.

Hope this helps!