CAPEX vs. Net Working Capital: What’s the Difference?

CAPEX vs. Net Working Capital: An Overview

Capital expenditures (CAPEX) and net working capital are both essential for the short-term and long-term success of a company. However, there are distinct differences between the two metrics.

Net working capital is different from CAPEX as it measures the short-term liquidity of a company. CAPEX, on the other hand, is a long-term investment in the future of a company.

Net working capital is related to CAPEX, though indirectly. For example, a company that generates positive net working capital consistently should have the financial viability to either make capital expenditures or obtain financing for capital expenditures.

Key Takeaways

• Capital expenditures (CAPEX) are purchases of physical or tangible assets, such as property, plant, and equipment, with long-term use.
• CAPEX generally has costs spread over several years.
• Net working capital measures if a company has enough current assets (e.g., cash or cash equivalents) to cover its current liabilities, which are financial obligations due within one year.
• Net working capital measures the short-term liquidity of a company, whereas CAPEX is a company’s long-term investment.

CAPEX

Capital expenditures are sizable purchases of physical or tangible assets, which will be used for more than one year. In other words, CAPEX might consist of purchases of fixed assets designed to improve earnings for the company in the long term. CAPEX can also include upgrades to existing assets like machinery, for example.

Other examples of CAPEX include property, plant, and equipment, buildings, computers, and company vehicles. As such, CAPEX items tend to have considerable costs that are spread over several years. 

CAPEX can also include intangible assets or non-physical assets, such as patents and licenses. Also, there are instances where research and development can be considered CAPEX.

Different industries require different levels of capital investment. For example, manufacturing companies tend to be capital-intensive, meaning they have substantial amounts of heavy equipment or fixed assets. As a result, they classify both the initial purchase of the equipment and upgrades to existing equipment as capital expenditure.

Net Working Capital

Net working capital is a liquidity metric used to determine if a company has enough short-term assets, called current assets, to cover its short-term liabilities, aka current liabilities.

Current assets include cash, cash equivalents, accounts receivable, and inventory. Current liabilities are financial obligations that are due in under one year; at most; many are due in 90 days or less.

Current liabilities include accounts payable, income taxes, dividends, short-term leases, and debt that matures within one year. Both current assets and current liabilities are listed on the balance sheet.

Net working capital is calculated by subtracting current liabilities from current assets. The calculation is used to measure the short-term liquidity of a company by creditors and investors.

Net working capital is a liquidity or solvency ratio; it shows how much money a company should have on hand over the next 12 months. Companies with poor net working capital numbers might find it difficult to obtain financing from creditors, investors, and banks. 

Note

Companies with a high net working capital are often better positioned to withstand economic downturns as they can cover short-term liabilities without needing external financing.

CAPEX vs. Net Working Capital Example

Below is Apple’s balance sheet for its fiscal year-end 2024. Under non-current assets, Apple lists CAPEX as “property, plant, and equipment” at $45.68 billion. Net working capital is a financial metric that will need to be calculated from Apple’s balance sheet.

Apple reports current assets of $152.99 billion and current liabilities of $176.39 billion. To calculate working capital, subtract current liabilities from current assets, resulting in a working capital of -$23.4 billion.

A negative working capital could indicate that a company has liquidity issues, as it may not be able to cover its short-term liabilities with its short-term assets. It can be normal for some industries, such as those in the retail space, where companies rely on rapid cash flows.

While Apple has a negative working capital, it is most likely not a cause for concern as Apple has high levels of cash reserves and does not rely on short-term liabilities to run its operations.

As part of its business model, Apple’s customers generally pay in cash and Apple reinvests that cash. Additionally, given its place in the industry, Apple has strong negotiating power with its suppliers. For these reasons, Apple’s negative working capital is not a cause for concern but rather a sound business strategy.

What Impact Does CAPEX Have on a Company’s Financial Health?

CAPEX, while a long-term investment, can significantly impact a company’s financial health by indicating its capacity to grow and expand; however, if CAPEX is excessive without proper planning, it may strain the company’s liquidity, especially if financing is needed. On the other hand, strategic and well-managed capital expenditures can help boost earnings and improve operational efficiency over time.

How Can Companies Manage Negative Working Capital?

While negative working capital can signal potential liquidity issues, it isn’t necessarily problematic, especially for companies with strong cash flows. Effective management involves ensuring that short-term obligations can still be met despite the negative balance. This can be achieved through efficient inventory management, faster receivables collection, and strong supplier relationships, helping the company operate efficiently without disrupting its operations and growth potential.

How Does a Company’s Industry Impact Its CAPEX and Working Capital?

The industry in which a company operates plays a significant role in its CAPEX and working capital requirements. Capital-intensive industries, such as manufacturing and utilities, tend to have high CAPEX needs for machinery and infrastructure, while industries like technology or retail might have different capital structures with lower physical asset investments. Similarly, companies in fast-moving sectors may require lower working capital, relying on fast inventory turnover and short-term credit.

The Bottom Line

CAPEX and net working capital are crucial financial metrics that highlight a company’s long-term investments and short-term liquidity, respectively. While CAPEX focuses on purchases of assets like property and equipment, net working capital assesses whether a company can cover its short-term obligations.