Lesson 2 of 8
Capital spending, three ways
Capex against revenue, against operating cash flow and against depreciation. Three ratios off the same number, and the different question each one answers.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Capital spending against revenue says how capital intensive the business is; against operating cash flow, whether the spending is self funded; against depreciation, whether the asset base is growing.
- The three can point in different directions in the same year, and the disagreement is the information.
- A single year of any of them says almost nothing, because capital spending is lumpy by nature.
Capital expenditure is one number in the cash flow statement and readers turn it into a ratio without saying which question they are asking. There are three sensible denominators and they are not interchangeable.
One filer's capital spending, three denominators, four filed years
- Capex to revenue
- Capex to operating cash flow
Show the numbers
| Capex to revenue | Capex to operating cash flow | |
|---|---|---|
| FY22 | 39.2% | 79.5% |
| FY23 | 49.4% | 492.4% |
| FY24 | 33.4% | 98.6% |
| FY25 | 42.4% | 90.5% |
Against revenue
Capital spending divided by revenue, which ValueScreener stores as capex to revenue. It answers how much a company has to spend on long-lived assets to produce a dollar of sales, which is a statement about the kind of business rather than about the year.
At the filer above it runs between 33 and 49 percent across four consecutive fiscal years. A business spending something close to four dollars in ten on plant is a different object from one spending one cent in a hundred, and the capital intensity course puts exactly those two side by side.
Against operating cash flow
The same numerator over the cash the business generated, which the product stores as capex to operating cash flow. It answers whether the spending was funded by the business or by something else, which is a question about this year rather than about the kind of business.
This is the ratio that moves. In fiscal 2023 it reads 492 percent, because capital spending of 7,676 million dollars ran against operating cash flow of 1,559 million. The company spent about five times what it generated. In every other year of the four it sits under one hundred percent.
Against depreciation
Capital spending divided by the depreciation and amortisation charge. Above one, the asset base is being added to faster than it is being written down. Around one, it is being replaced. Below one for several years, it is being harvested.
This is the slowest of the three to move and the one least often quoted, and it is the one that most nearly answers the question the cycle track is interested in, which is whether long-lived capacity is being added rather than maintained.
Why one year tells you little
Capital spending is lumpy. A fabrication plant, a rig, a ship or a plant expansion lands in one or two fiscal years and then does not recur. A single high reading is as likely to be a project as a pattern, and a single low one as likely to be a gap between projects as a decision.
The product stores a capital expenditure consistency figure for this reason, which measures how steady the spending has been rather than how large. Read the run of years before reading the year.
Check yourself
Which denominator tells you whether this year's spending was funded by the business?
- Revenue
- Operating cash flow
- Depreciation and amortisation
Show the answer
Answer: B.
Capex to revenue describes the kind of business. Capex to operating cash flow describes whether the year paid for itself.A filer reports capex of 7,676 million against operating cash flow of 1,559 million. What is the free cash flow?
- Positive 6,117 million
- Negative 6,117 million, because operating cash flow less capital expenditure is 1,559 less 7,676
- Not computable without net income
Show the answer
Answer: B.
Free cash flow here is operating cash flow less capital expenditure. The ratio of 492 percent and the negative 6,117 million are the same fact stated twice.Why is one year of capital spending weak evidence?
- Because the figure is unaudited
- Because capital spending is lumpy, so one high year is as likely to be a project as a pattern
- Because it is reported net of disposals
Show the answer
Answer: B.
A plant or a ship lands in one or two years and does not recur. Read the run of years, which is what a consistency measure is for.Sources
- Micron Technology, Inc., annual reports on Form 10-K for fiscal years 2022 through 2025, for capital expenditure, revenue and operating cash flow: fiscal 2022 accession 0000723125-22-000048 filed 7 October 2022; fiscal 2023 accession 0000723125-23-000054 filed 6 October 2023; fiscal 2024 accession 0000723125-24-000027 filed 4 October 2024; fiscal 2025 accession 0000723125-25-000028 filed 3 October 2025.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Four fiscal years is not a cycle. The readings above describe those four years at one company and nothing more general.
- Capital expenditure as reported in a cash flow statement is payments for property, plant and equipment, which is not the same as commitments made or capacity ordered.
- Nothing here is a view on Micron or on any security.