Growth Capex vs. Maintenance Capex: What is the Difference?
Growth Capex consists of the purchase of fixed assets in order to increase its operating cash flows (and valuation) beyond that of historical levels, whereas Maintenance Capex consists of the spending required to sustain its current state of growth and profitability.
What is the Difference Between Growth Capex vs. Maintenance Capex?
Combined, growth and maintenance capex are the two components of a company’s total capex.
The distinction between growth capex vs. maintenance capex is the underlying intent behind the purchase.
- Growth Capex → Growth Capex, as implied by the name, entails discretionary spending by a company in order to increase its growth. Common methods to drive future revenue and operating cash flows include implementing new strategic plans to acquire new customers and reach new end markets. The high-level objective here is to surpass historical figures and reach the next stage of growth.
- Maintenance Capex → In contrast, maintenance Capex consists of the recurring expenditures required for a company to continue operating and sustain its growth. For maintenance Capex, the spending is a necessity for the company to maintain its current state, rather than being considered discretionary spending.
Capex tends to be the most significant growth catalyst for companies, i.e. the periodic outflow of cash related to long-term strategic investment, and thereby a core driver of future growth.
Yet, from a different perspective, Capex can also function as a constraint on growth for companies that have a limited amount of funding or cash on hand. Hence, a capital-intensive industry can benefit from the strong barriers to entry created by the need for heavy spending.
What is an Example of Growth Capex vs. Maintenance Capex?
Growth Capex is oriented around increasing revenue and profits beyond historical levels, which can result from stealing more market share from existing incumbents, acquiring new customers quickly, capitalizing on upsell opportunities, new product offerings, etc.
- Growth Capex Examples → With that said, a company opening new store locations and purchasing modern equipment would also be categorized as growth Capex, since the spending expands the capacity at which the company can operate and strengthens its asset base.
On the other hand, maintenance Capex is more focused on protecting existing market share and avoiding a deterioration in financial performance caused by a lack of capital assets.
- Maintenance Capex Examples → The repair of equipment and replacement of computers are a couple of examples of maintenance Capex. The intent of these purchases is not to attract more customers and expand the company’s operating capacity. Instead, the spending is meant to ensure no customers are lost beyond a reasonable rate and that the company’s current capacity remains consistent.
Total Capital Expenditures Formula (Capex)
The formula to calculate the total capital expenditures (Capex) of a company is as follows.
But to understand a company’s Capex spend in more detail and the total capex in a historical period, the distribution between growth and maintenance capex can be obtained from the fixed asset schedule in a public company’s filings.
How to Analyze Growth vs. Maintenance Capex?
The proportion of a company’s total Capex spending allocated towards growth Capex as opposed to maintenance Capex can be informative in terms of understanding the current state of a company’s growth trajectory.
Before periods of outsized revenue and customer growth, significant spending on growth most often precedes the upward trajectory, i.e. growth comes at a cost.
If a company’s total capex is mostly composed of maintenance Capex, the company is most likely mature and in the later stages of its lifecycle, which coincides with limited growth opportunities.
Given the need to reinvest into operations, companies with a business model characterized by a high degree of capital intensity would expect less free cash flows (FCFs), all else being equal. The ratio between a company’s depreciation and capital expenditures can be insightful to gauge a company’s growth profile and its current stage in its lifecycle.
- Low Growth Trajectory → The more mature and established a company becomes over time, the less spending is allocated towards growth. Mature companies with no or minimal growth investment opportunities will have a depreciation to Capex ratio near 1.0, or 100%.
- High Growth Trajectory → If a company’s depreciation to Capex ratio far exceeds 1.0x, or 100%, it would be a reasonable assumption to anticipate above-market growth in the coming periods (or at least understand the fact that growth is the management team’s current priority).
Growth Capex vs. Maintenance Capex Calculator
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Growth Capex vs. Maintenance Capex Calculation Example
Suppose you’re tasked with calculating the total capital expenditures of a public company across the next four fiscal years.
Based on management guidance, the company’s projected revenue in Year 1 is $100 million, with the following year-over-year growth rates afterward:
- Year 1 to Year 2 = 10.0%
- Year 2 to Year 3 = 5.0%
- Year 3 to Year 4 = 3.5%.
In addition, management has provided the following forward-looking estimates for spending on growth Capex:
- Year 1 = $12 million
- Year 2 = $6 million
- Year 3 = $4 million
- Year 4 = $1 million
Thus, we can see the amount of growth capex gradually decline from $12 million to $1 million from Year 1 to Year 4.
In terms of the company’s anticipated spending towards maintenance capex, the management team expects it to remain constant at $4 million for the entirety of the forecast period.
Upon adding the two types of capital expenditures together, the total Capex is as follows.
- Year 1 → $12 million + $4 million = $16 million
- Year 2 → $6 million + $4 million = $10 million
- Year 3 → $4 million + $4 million = $8 million
- Year 4 → $1 million + $4 million = $5 million
For illustrative purposes, the assumptions surrounding our hypothetical scenario are intentionally set a bit unrealistic.
While rarely will it be this explicit in reality, we can see the clear relationship between revenue growth and growth Capex, i.e. the periods of higher growth rates corresponded with increased spending towards growth Capex (and vice versa).
In the final part of our exercise, we’ll determine the proportion of total Capex attributable to growth capex vs. maintenance capex.
Starting in Year 1, the split was 75.0% growth Capex to 25% maintenance Capex, which later on, reverses course to 20% to 80% by the end of the forecast period.