What is Cash Flow to Capital Expenditures?
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.to
How Does Cash Flow to Capital Expenditures Work?
The formula for cash flow to capital expenditures is:
Cash Flow to Capital Expenditures = Cash from Operations/Capital Expenditures
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 Does Cash Flow to Capital Expenditures Matter?
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.to
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.