CAPEX AND OPEX

(CAPital EXpenditures) Refers to the cost of developing a product or system. OPEX (operating expenditures) are the ongoing costs for running it. For example, the purchase of a printer is the CAPEX, and the annual paper and ink cost is the OPEX. For larger systems, OPEX may also include the cost of human operators and facility expenses such as rent, electricity, heating and air conditioning.



CAPEX
CAPEX is investment in the business. It adds shareholder value. But this new additional shareholder value is almost entirely created by the CASH FLOW created by the investment, not really the physical assets you buy, although there could be an element of this. This cash flow is why you invest in the first place and in the vast majority of cases is the prime component of the shareholder value that is added (ie stock price goes up). Assets depreciate so that value eventually disappears. What is left over is the cash flow. Put another way, CAPEX is the money you stump up today in the hopes of getting a nice stream of cash later on. Physical assets are merely a means to an end. Capital gains do play a part in it as well but let's keep it simple for now.

This is why telecoms companies who invested billions in networks are being sold off for mere millions. The assets are in the ground, and while not 100% depreciated, they will be eventually. Thus, the physical assets are for all intents and purposes worthless. What is valuable is the cash flow you can generate with those assets but this is plummeting daily because of the fall in bandwidth prices, hence the relatively small enterprise values we're seeing.

CAPEX can be externally financed. Collateral for debt financing can be anything you and the lender agree on. Anything. But all they care about is interest payments and getting their money back in the end. Equity investors are different - they're greedy. They want it all. If financing with equity, then you are in essence promising the entire future cash flow of the project to your investors.

OPEX
OPEX is COGS, SG&A and R&D. It's what you have to spend in order to keep your business running. OPEX is deducted from your revenue to get operating profit. Put another way, OPEX is a measure of the (in)efficiency of your business. It has a direct correlation with enterprise value. You reduce OPEX (without hurting your core business), and you increase enterprise value. Lay off a bunch of people, and your stock price goes up.

More on the accounting of OPEX/CAPEX:
After all of your operating expenses (COGS, SG&A, R&D) are deducted from revenue you are left with operating profit, aka EBITDA. This number is the most basic measure of the health of the business. If you can't make money by selling your products then it shows up here. And warning lights should be going off in investor's heads.

It is from this pile of money that CAPEX is drawn from amongst other things like tax, interest to service debt, and anything left over is put in the bank or returned to shareholders. This is a very simplistic view but is more or less how it works.

EBITDA is also where cash flow and accounting profit/loss (aka earnings, EPS, net profit - all the same thing) diverge. I won't go into it here, but cash flow does have a direct bearing on how CAPEX is allocated in many cases.