Capex vs. Opex
CapexCapex is a widely used shortening of the term capital expenditure and refers to expenses a business incurs to create benefit in the future. Purchases of new buildings or machinery would be considered capex as these are expenses a company is incurring that are expected to generate a benefit into the future.
The significance of capex in business budgets is that it demonstrates how much a business is spending to invest in its future. This is why the capital expenditure budgets of many public companies are followed in such detail by analysts. It's also a number that can vary greatly from year to year so it is far more important to consider a company's capital expenditures over a period of time. In a single year it can be easy for a company to have very little capex and taken alone that could be concerning. However if you then look at the preceding and following years a completely different picture can appear.
Appropriate capital expenditure really varies from industry to industry, with some industries (i.e. oil & gas) requiring significant capital investment, and others (i.e. retail) requiring far lower capital investment. When looking at any company's capex you'll also want to look at their peers for the best assessment or comparison of how they are doing.
OpexOpex is the widely used shortening of the term operating expenditure and refers to expenses a business incurs in its day to day operations. Operating expenses don't typically have a future benefit and include expenses like wages, utilities, and rent. General repairs and maintenance of buildings and equipment are also considered operating expense, assuming improvements and additions aren't being made that impact the efficiency or useful life of the asset.
The significance of opex is that as no future benefits are gained these are really the costs of doing business and need to be managed on a year to year basis. A company can easily end up losing money if their opex is too high and eats away all of their profits. While incurring debt to pay for capex is not always a concern, as future benefits will be realized to offset that debt, incurring debt to pay opex is a major problem.
Opex also varies from industry to industry so it is important to compare any opex figures for a company you are looking at to the figures of other peers in the industry.
Accounting & Tax TreatmentOpex and capex vary significantly in how they are treated for accounting and tax purposes. Capital expenditures are typically recognized as assets on the balance sheet, and their value expensed over several years. Operating expenditures are expensed on the income statement immediately. For tax purposes the treatment is often the same (with occasional exceptions for certain types of capital or operating expenditures).
This results in competing pressures at companies in terms of choosing whether to book some grey area expenses as capital or operating in nature. To improve a company's financial net income there is an incentive to consider an expense as capex, spreading the expense over several years. To reduce taxes in a year there is an incentive to consider an expense as opex, recognizing the expense immediately and reducing the overall tax bill for the year. Companies are constantly weighing these decisions where there is room for an accounting choice and the treatment is not specifically indicated.
By Jeffrey Glen
Posted in ...Business