Capital expenditure (capex) and net working capital as is necessary for short-term and long-term success of the company. However, there are clear differences between the two.
What is capital expenditure?
Capital costs make up a significant acquisition of physical or tangible assets that will be used for more than one year. In other words, the capital investment can include acquisition of fixed assets intended to improve profits for the company in the long term. Capital expenditures also include upgrading existing assets, such as machinery, for example.
Other examples include capital property, plant and equipment, buildings, computers and company vehicles. As such, the elements of capex, as a rule, significant costs that are spread over several years. Capital expenditures also include intangible assets or intangible assets such as patents and licenses. In addition, there are cases where research and development can be considered capital.
Different industries require different levels of investment. For example, manufacturing companies tend to be capital intensive, that is, they have a significant number of heavy equipment or fixed assets. As a result, the initial acquisition of equipment and upgrading existing equipment would be classified as capital expenditures.
What Is Net Working Capital?
Net working capital is a liquidity metric is used to determine if a company has enough short-term assets are called current assets to cover its short-term liabilities or current liabilities.
Current assets include cash, cash equivalents, receivables and inventories. Current liabilities are financial liabilities that must be presented within one year – in most, many generally due in 90 days or less. Current liabilities include accounts payable, taxes, income, dividends, short-term lease and debt that Matures within one year. Both current assets and current liabilities listed on the balance sheet.
Net working capital is calculated by subtracting current liabilities from current assets. The calculation is used to assess short-term liquidity of the company by creditors and investors.
Net working capital is the liquidity ratio or solvency because it shows how much money the company needs to have on hand over the next 12 months. Negative net amount of working capital can be difficult to obtain financing from lenders, investors and banks.
Net working capital is different from capital costs, since it measures short term liquidity of the company. Capital investments, on the other hand, is a long-term investment in the future of the company. Net working capital related to capital investments, albeit indirectly, however. For example, a company that generates a positive net working capital on a permanent basis must have financial viability, or to make capital expenditures, or obtain financing for capital expenditures.
For more on this topic, please read the “how capex and opex differently?”