CAPEX vs OPEX | Capital Expenditure and Operational Expenditure
CAPEX and OPEX are terms that are encountered quite often in business valuation. What is the true worth of a business and how does the value of a business change over time are measured in terms of Capital Expenditures (CAPEX) and Operating Expenditures (OPEX). It has been seen that sometimes, shares of IT companies suddenly surge increasing the valuation of the company. In today’s world where economy is dominated and driven by knowledge, it is through CAPEX and OPEX that jigsaw puzzle of intellectual capital and brand equity is solved.
Business valuation often starts with the measurement of CAPEX and OPEX.
CAPEX refers to all assets, whether tangible or intangible, that is made use of, to generate more business and thus, revenues. CAPEX is an investment in the business. It adds to shareholders value. These are expenditures made keeping in mind future benefits. These investments could be on machinery, equipment, property or upgrade of apparatus. It is usually shown in the financial statement as cash flow or investment in plant, machinery or similar head. Depreciation of such assets takes place every year until it becomes zero.
Operating Expenditure (OPEX) refers to expenses that are incurred on maintenance and running of assets generated through CAPEX. Day to day running expenses for sales and administration and R&D are taken as OPEX. Thus OPEX are expenses that are necessary to maintain capital assets. Earnings before interest, the magical figure in which everyone from shareholders to the management are interested in, is arrived at deducting OPEX from the operating revenue.
Difference between CAPEX and OPEX
The distinction between CAPEX and OPEX has become very complicated today especially in companies where products and services are driven by knowledge workers.
In general, CAPEX is what needs to be avoided, while OPEX is something to be kept under tight control.
CAPEX can be financed externally. But these investors are interested in interest payments and getting their money back in the end. It is riskier with equity financiers as they want it all. You are in essence promising the investor entire cash flow of future. CAPEX eventually depreciates and all that is left is cash flow.
OPEX can be considered to be (in) efficiency of any business. It has a direct relation with the value of the business. If you can reduce OPEX without hurting day to day operations, you eventually increase valuation of any business.
When you fire a few people who were inefficient, you are bringing down OPEX and thus increasing the value of business.
• CAPEX stands for Capital Expenditures and is the money spent of generating physical assets.
• OPEX stands for Operating Expenditures and refers to day to day expenses required to maintain physical assts.
• CAPEX and OPEX are necessary to be measured to arrive at the valuation of any organization.