What Does Growth Capex Mean?
Growth capex is the capital expenditure undertaken by an organization to further its growth prospects and/or expand its existing operations. This investment made by the organization is used to attract new customers, develop new business segments or to increase the capacity for a larger business.
Divestopedia Explains Growth Capex
Growth capex is used to expand and grow the organization. On the other hand, when capital expenditure is made
to keep the existing operations running smoothly, then it is called
maintenance capex. There are two reasons for companies to spend additional money on capital
expenditure and they are either to grow the organization or to meet the
existing operational costs. Examples include purchasing new machines to
process additional orders that come from new customers or upgrading
software as mandated by new corporate clients.
The financial records of the company do not distinguish between the growth capex and maintenance capex, but in general, Growth capex = Total capex - Depreciation (which is a proxy for maintenance capex).
Based on the nature of a capex investment and the financial needs of the organization, it can pay for it using the company's cash (called internal funding) or third-party debt.
Growth vs. maintenance capex becomes important in the preparation of a discounted cash flow valuation model and determination of free cash flows. Here are two specific examples to consider:
- A company's revenues have been growing significantly year over year. Is the growth due to better utilization on existing capital or a significant investment in growth capex?
- Projected revenue in a financial model is showing significant growth. Do the capex requirements in the projections adequately reflect the amount of capital required to maintain existing capacity levels and also achieve the grow targets?