Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Cash Flow to Capital Expenditures

What it is:

Cash flow to capital expenditures is the ratio of a company's cash from operations to its capital expenditures for acquiring or upgrading assets, such as buildings or equipment, required to improve or maintain business operations.

It is an important measure used by analysts to determine a company's ability to fund operations.

How it works (Example):

The formula for cash flow to capital expenditures is:

Cash Flow to Capital Expenditures = Cash from Operations/Capital Expenditures

Analysts sometimes use free cash flow in the numerator.

Let's assume that during the fourth quarter, Company XYZ reported cash from operations of $4 million and capital expenditures of  $10 million. Using the formula above, the company's cash flow to capital expenditures can be calculated as follows:

$4 million/$10 million = 0.40

It is important to note that cash flow can come from several measures (EBITDA, free cash flow, cash from operations, etc.), and thus it is best for analysts and investors to understand which cash flow measure is used in the calculation.

Why it Matters:

Cash flow to capital expenditures is a ratio that helps investors and analysts understand a company's ability to buy more assets, and do so without having to issue debt or equity. For that reason, a rising cash flow to capital expenditures ratio might indicate that the company is in a position to grow -- and growth is generally what increases share price and shareholder wealth. Thus, analysts are keenly interested in the cash flow to capital expenditures ratio.

It is also important to note that some industries are more capital intensive than others, and thus comparisons of companies in different industries should be made within this context.

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