Capex vs Opex

Capex and opex describe two ways money leaves a business. Capital expenditure buys long-lived assets such as machines and buildings, so the cost is capitalized on the balance sheet and spread across the income statement through depreciation. Operating expenditure covers day-to-day running costs like rent and salaries, expensed in full the moment they are incurred. The split shapes how spending hits every statement.

Definition and the treatment

Capex is spending on assets expected to benefit the business for more than one year. The full outflow appears as investing activity in the cash flow statement, but only the depreciation portion hits the income statement each year. The asset sits on the balance sheet net of accumulated depreciation.

Opex is expensed immediately and reduces profit in the period incurred. There is no asset created and no future depreciation. The cash outflow is an operating activity, and the timing of the expense matches the cash.

Worked example in Excel

A company spends 500 on equipment with a five-year life. Compare it to spending 500 on opex in the same year. Put the capex in B2 and the useful life in B3.

1. Capex outflow on day one: 500 in B2, with life 5 in B3.
2. Annual depreciation, straight-line: =B2/B3 returns 100.
3. Year-one income statement hit from capex: only the 100 of depreciation.
4. Year-one income statement hit from opex of 500: the full 500, five times larger.

=500/5 returns 100, the annual depreciation on the capitalized asset.

Why it matters

Capitalizing a cost smooths its income statement impact over years, which flatters near-term profit relative to expensing the same dollars. This is why the capex versus opex line can materially change reported margins and EBITDA.

Across the three statements, capex hits cash now, the balance sheet for years, and the income statement gradually through depreciation. Opex hits cash and the income statement together and never touches the balance sheet.

• Capex: balance sheet asset, depreciated over its life.
• Opex: expensed now, no asset, no depreciation.
• EBITDA excludes depreciation, so capex looks cheap there.

Nuances and mistakes

A classic mistake is forgetting that capitalized assets still consume cash today. EBITDA ignores depreciation, so heavy capex businesses can look more profitable than they are on a free cash flow basis. Always subtract capex to get free cash flow.

The boundary is not always obvious. Software development, repairs that extend asset life, and major refits can fall on either side depending on the accounting policy. Be consistent, since reclassifying opex as capex is a known way to inflate near-term earnings.