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Capex Vs Opex - Difference and Comparison - Diffen

The document explains the differences between capital expenditure (Capex) and operational expenditure (Opex), highlighting that Capex involves long-term investments in assets while Opex covers day-to-day operational costs. It details how these expenditures are accounted for in financial statements, with Capex being capitalized and depreciated, whereas Opex can be fully deducted in the year incurred. The document also discusses the tax implications and cash flow considerations related to both types of expenditures.

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Alvin Chan Ka Lai
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3 views3 pages

Capex Vs Opex - Difference and Comparison - Diffen

The document explains the differences between capital expenditure (Capex) and operational expenditure (Opex), highlighting that Capex involves long-term investments in assets while Opex covers day-to-day operational costs. It details how these expenditures are accounted for in financial statements, with Capex being capitalized and depreciated, whereas Opex can be fully deducted in the year incurred. The document also discusses the tax implications and cash flow considerations related to both types of expenditures.

Uploaded by

Alvin Chan Ka Lai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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2016/4/20 Capex vs Opex ­ Difference and Comparison

Capex vs Opex ­ Difference and Comparison

Capex, or capital expenditure, is a business expense incurred to create future benefit (i.e.,
acquisition of assets that will have a useful life beyond the tax year). For example, a business might
buy new assets, like buildings, machinery, or equipment, or it might upgrade existing facilities so their
value as an asset increases.

On the other hand, those expenditures required for the day­to­day functioning of the business, like
wages, utilities, maintenance, and repairs, fall under the category of Opex, or operational
expenditure. Opex is the money the business spends in order to turn inventory into throughput.
Operating expenses also include depreciation of plants and machinery which are used in the
production process.

Examples

Capital expenditures include acquiring fixed assets (tangible, e.g. machinery or intangible e.g.
patents), fixing problems with an asset, preparing an asset to be used in business, restoring property
so that value is added, or adapting it to a new or different use.

Operating expenditures include license fees, maintenance and repairs, advertising, office
expenses, supplies, attorney fees and legal fees, utilities such as telephone, insurance, property
management, property taxes, travel and vehicle expenses, leasing commissions, salary and wages,
raw materials.

Accounting for Capex and Opex

The crux of the matter lies in the way these expenditures are accounted for in an income statement.

Since capital expenses acquire assets that have a useful life beyond the tax year, these expenses
cannot be fully deducted in the year in which they are incurred. Instead, they are capitalized and
either amortized or depreciated over the life of the asset. Intangible assets like intellectual property
(e.g. patents) are amortized and tangible assets like equipment are depreciated over their lifespan.

Operating expenditure, on the other hand, can be fully deducted. "Deducted" means subtracted from
the revenue when calculating the profit/loss of the business. Most companies are taxed on the profit
that they make; so what expenses you deduct impacts your tax bill.

What is preferred: Capex or Opex?

From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather
than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a
vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even

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2016/4/20 Capex vs Opex ­ Difference and Comparison

though the company pays $800 upfront for the equipment, it can only deduct about $250 as an
expense in that year.

On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense
because it was incurred as part of the day­to­day business operations. The company can, therefore,
rightfully deduct the cash it spent that year.

The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net
income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving
$100 in taxes this year is better than saving $104 in taxes next year.

However, tax may not be the only consideration. If a public company wants to boost its earnings and
book value, it may opt to make a capital expense and only deduct a small portion of it as an expense.
This will result in a higher value of assets on its balance sheet as well as a higher net income that it
can report to investors.

Videos

Operating expenses are sometimes also called Revenue Expenditure. Here are two videos
comparing capital and operational expenses.

Capex and Cash Flow

Investors often look not only at the revenue and net income of a company, but also at the cash flow.
The reported profit, or net income, can be "manipulated" via accounting techniques and hence the
idiom "Income is opinion but cash is fact." Operating expenses directly reduce the Operating Cash
Flow (OCF) of the company. Capex does not figure in the calculation of OCF but capital expenditures
reduce the Free Cash Flow (FCF) of the company. Some investors treat FCF as a "litmus test" and
do not invest in companies that are losing money, i.e. have a negative FCF.

Amazon is an example of a company with very high capital expenses. The following chart, by
Benedict Evans, shows the growth in OCF, capex and FCF for Amazon since 2003.

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2016/4/20 Capex vs Opex ­ Difference and Comparison

OCF, capex and FCF for Amazon from 2003 to 2014. Operating cash flow has grown significantly, but so has capex,
leaving Free cash flow stagnant.

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