Capital Expenditure As a Measure of Valuation Risk Essay

Capital Expenditures

The Home Improvement industry has shown improvement since the financial crisis of 2008. Two companies are of particular interest: Lowes Companies, Inc. And Home Depot, Inc.

Capital Expenditures. The Capital Expenditures made by a company are used to acquire or upgrade tangible assets such as facilities, equipment, or other property. The general purpose of capital outlay is to maintain the scope of operations or increase operations in some way. Capital expenditures are industry sensitive, with industries in telecom, oil, or utilities operations particularly capital intensive. A capital expenditure that maintains an asset in its current condition is deducted in its entirety in the year of the expense. Alternately, a capital expenditure that is used to purchase a new capital asset or increases the useful life of an existing capital asset is treated as an expense that must be capitalized. That is to say that the cost of the new or improved asset must be spread over the remaining useful life of the asset.

Calculating Capital Expenditures. From the balance sheet of the annual report, identify the worth of total assets. The objective at this step is to identify the change in total assets from the previous year to the current year. Identify the amount of total liabilities.The objective is to identify the change in total liabilities from the previous year to the current year. The change in total liabilities is deducted from the change in total assets. The resulting amount obtained indicates the amount spent on for capital outlay for the year.

Other methods for calculating capital expenditures require the subtraction of the net amount of the fixed assets for the preceding year from the amount of fixed assets for the year just ended, with these further adjustments. The intangible assets must be stripped out, as intangible assets are commonly obtained through acquisition not through capital expenditure. Subtract the total accumulated depreciation from the previous year from the total amount of accumulated depreciation for the year just ended, without factoring in any amortization. Add the total depreciation for the year to the change in net amount of fixed assets. This result is the total amount spent on capital expenditures during the measurement period.

Lowes Companies, Inc.

The five-year capital expenditures for Lowes Companies, Inc., broken down by fixed assets and other assets, are shown below.

Lowes Companies, Inc.

2010

2011

2012

2013

2014

Capital Expenditures

(1.86B)

(1.43B)….....