More CAPEX the better?

Whenever I look at a company’s financials, one of the first things I check is its capital expenditures (CAPEX). On the surface, big CAPEX numbers can be exciting—it feels like the company is investing heavily in its future. But the truth is, CAPEX can be a double-edged sword. The impact ripples across earnings, the balance sheet, and cash flow, and not all CAPEX is created equal.

Earnings: The Hidden Lag Effect

Here’s the tricky part: when a company spends on CAPEX, the cost doesn’t immediately hit the income statement. Instead, it gets spread out over time through depreciation.

That means:

• In the short term, earnings look healthier because the expense is pushed into the future.
• Over time, those depreciation charges start chipping away at net income, even though the cash went out the door years ago.

So when I see strong earnings from a CAPEX-heavy business, I always ask: “Are these profits sustainable, or just a result of accounting timing?”

Balance Sheet: Bigger Isn’t Always Better

Every dollar of CAPEX shows up as an asset on the balance sheet. At first glance, that’s great—the company looks like it’s building value. But here’s the flip side:

• Those assets depreciate year after year, reducing book value.
• If CAPEX is funded with debt, liabilities climb, and leverage ratios get stretched.
• If funded with cash or equity, it eats into liquidity or dilutes shareholders.

In other words, more CAPEX doesn’t automatically mean a stronger company—it depends on how it’s financed and what returns it actually generates.

Cash Flow: Where the Truth Lies

If you want to see the real impact of CAPEX, the cash flow statement tells the story. CAPEX shows up under investing activities as a big outflow, which often explains why a company can look profitable but still struggle to generate free cash flow (FCF).

• Free Cash Flow = Operating Cash Flow – CAPEX
• Heavy CAPEX can turn positive earnings into negative FCF.

That’s why, when evaluating a business, I put more weight on free cash flow than on reported net income. Earnings can flatter; cash flow tells the truth.

Two Stories of CAPEX

✅ Amazon: CAPEX That Paid Off

Amazon poured billions into warehouses, data centers, and logistics long before investors gave it credit. For years, its free cash flow looked squeezed. But those investments gave Amazon Prime and AWS their edge, and today they’re indispensable parts of the business. That’s CAPEX done right—pain in the short term, huge payoff later.

❌ Intel: CAPEX Gone Wrong

Contrast that with Intel. The company spent heavily on new chip fabs, but execution delays and falling behind TSMC meant those billions didn’t translate into leadership. Instead, CAPEX became a drag—proof that spending more doesn’t guarantee better results.

When CAPEX Gets Shady

There’s also a darker side. Some companies have tried to game the system by classifying regular expenses as CAPEX. WorldCom did exactly this—moving billions of routine costs into CAPEX to make earnings look stronger. It worked… until it didn’t. The fallout wiped out the company and became one of the biggest accounting scandals in history.

So, Is More CAPEX the Better?

Not necessarily. CAPEX is a tool—it can fuel growth, or it can burn through cash with little to show for it. For me, the key questions are:

• Why is the company spending this money?
• How will it translate into future cash flows?
• Can the business actually execute on these investments?

At the end of the day, CAPEX only adds value if it creates returns greater than its cost. Otherwise, it’s just expensive window dressing.

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