What are some examples of companies that have high capital expenditures (CAPEX)?

The capital to expenditure (CAPEX) ratio is a measure used by investors to assess the future prospects of a company. The ratio shows how comfortably a compay can finance its capital expenditures after paying for its operating activity and paying dividends to shareholders.

Understanding the Capital Expenditure (CAPEX) Ratio

CAPEX can be used to encourage growth or to boost productivity. A company that uses CAPEX for production will have higher annual maintenance costs but will likely have a lower valuation than a company that does not have such high annual maintenance costs.

Such a company, however, can use its CAPEX to increase revenue and productivity. Regardless of how CAPEX is used, it is reported as expenditures on the income statement and calculated as a percentage of annual revenue that may reduce profit and negatively affect the company’s valuation.

Calculating the Capital Expenditure (CAPEX) Ratio

The formula for calculating the CAPEX ratio is the following:

CAPEX Ratio = Operating Cash Flow / Capital Expenditures

If the company makes payments to the equity holders in the form of dividends, these payments are priority. Therefore, the amount of the operating cash flow is adjusted for the amount of dividends and then compared to the amount of capital expenditures.

CAPEX Ratio = (Operating Cash Flow – Dividends) / Capital expenditures

Interpreting the Capital Expenditure Ratio

If the value of the indicator exceeds 1, this indicates that the company has sufficient funds to finance its own development. If the value is lower than 1, the company needs additional funds from external sources of financing to implement active investment programs in the future.

Five companies with high capital expenditures (CAPEX) include Alphabet, AT&T, Amazon.com, Verizon Communications, and Microsoft.

Alphabet

In 2018, Alphabet committed $20.2 billion to capital expenditures. According to CSI Market, the company’s average capital expenditure ratio is 49.51%. According to Ruth Porat, CFO, Alphabet expected its growth in capital expenditures to slow in 2019, and the COVID-19 epidemic will no doubt have had a dampening effect on the company’s investments. However, according to SDxCentral, Google and Alphabet CEO Sundar Pichai suggested that the company would invest more than $10 billion in 2020 into offices and data centers in the United States.

AT&T

In October, 2020, the third largest telecom operator continues to expect gross cap/ital investment in the $20 billion range in 2020, according to Telecomlead. In 2019, AT&T committed $19.6 billion to capital expenditures.

Amazon.com

In 2018, Amazom.com committed $15.6 billion to capital expenditures.

Verizon Communications

In 2018, Verizon Communications committed $14.9 billion to capital expenditures.

Microsoft

In 2018, Microsoft committed $11.5 billion to capital expenditures.

which invested an estimated $20.2 billion in domestic capital expenditures in 2018. AT&T comes in second, spending an estimated $19.2 billion on U.S. capital expenditures. Amazon.com, Verizon Communications, and Microsoft complete the top five. The top energy companies are Exxon Mobil and Duke Energy, and our top two transportation companies are FedEx and Delta. Broadband providers represent four of the top ten companies on our list (with Comcast and Charter Communications joining AT&T and Verizon).

Tesla Motors, General Motors, Apple Computer, Nike, and Facebook. The capital expenditures of these five companies from different industries are compared using the CAPEX to sales ratio and free cash flow to CAPEX ratio.

For fiscal year 2013, Tesla Motors had a CAPEX to sales ratio of 13.12% and a free cash flow to CAPEX ratio of -2.36%.

For fiscal year 2013, General Motors had a CAPEX to sales ratio of 25.01% and a free cash flow to CAPEX ratio of 28.62%.

For fiscal year 2014, Apple Inc. had a CAPEX to sales ratio of 22.72% and a free cash flow to CAPEX ratio of 523.87%.

For fiscal year 2014, Nike, Inc. had a CAPEX to sales ratio of 25.01% and a free cash flow to CAPEX ratio of 240.91%.

For fiscal year 2013, Facebook had a CAPEX to sales ratio of 42.52% and free cash flow to CAPEX ratio of 209.99%.

Tesla Motors and General Motors are both automobile manufacturers, but their businesses are so different that they may as well be involved in different industries. Of all the companies on this list, the CAPEX spending of Tesla Motors is the most intensive. When considering CAPEX to sales, Tesla Motors’ 13.12% does not seem especially high. Indeed, General Motors’ CAPEX to sales is almost twice as high and almost 40 times larger when viewed as a net dollar figure ($264.22 million for Tesla Motors and $9.819 billion for General Motors). However, when considered using free cash flow to CAPEX, Tesla Motors has a ratio of -2.36. General Motors’ free cash flow to CAPEX is 28.62%, showing that Tesla Motors has dedicated all of its operating cash flow to CAPEX spending, while General Motors still has a significant amount of free cash flow left after CAPEX spending.

Reasons for this difference can be explained by looking at Tesla Motors’ position as the first major manufacturer of electric cars; all product designs, factories, production plans, suppliers and all other necessities of business have been created from scratch. General Motors is over 100 years old and invests significantly in its infrastructure, as is revealed by its high net level of CAPEX. However, when comparing the amount of free cash flow that General Motors dedicates to CAPEX spending proportionate to its business, this amount is significantly less.

With 22.72% of sales being dedicated to CAPEX spending, Apple Inc. certainly invests a great deal in its infrastructure. However, the company has a high level of free cash flow available compared to its CAPEX spending, indicated by a high free cash flow to CAPEX ratio of 523.87%.

Facebook dedicated 42.52% of its sales on CAPEX spending in 2013. This amount is quoted as being double the rest of the Internet advertising market combined. Facebook is aggressively expanding its capacity with plans for moving into emerging markets.

Nike, Inc. is a mature business that continues to grow. With CAPEX spending at 11.02% of its sales, the company obviously takes the maintenance and expansion of its capital infrastructure seriously. Nike, however, does not dedicate as much of its resources to CAPEX as other companies, such as Tesla Motors, General Motors, and Facebook.