canonical/modules/M015-capital-expenditures-depreciation-and-asset-intensity.md

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<!-- Module: 015 | Title: Capital Expenditures, Depreciation, and Asset Intensity -->

## PART III - ACCOUNTING FOUNDATION | MODULE 015

# Capital Expenditures, Depreciation, and Asset Intensity

> Mission. Distinguish maintenance from growth investment and reconcile capex to productive capacity.

## Decision output

Objective: Distinguish maintenance from growth investment and reconcile capex to productive capacity. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Reconcile PP&E beginning balance, capex, acquisitions, disposals, FX/reclassifications, depreciation, and ending balance by major asset class when available.

1. Separate maintenance capex from growth capex using asset age, replacement cycles, capacity, utilization, management plans, physical footprint, and peer evidence rather than management labels alone.

1. Map capex to the productive capacity or service capability it creates and estimate lag from cash spend to revenue and mature utilization.

1. Test useful lives, residual values, depreciation method, capitalized interest, and asset impairments for changes that alter reported margin without equivalent economics.

1. Calculate asset turns, capex/depreciation, capex/revenue, and incremental ROIC through a full investment cycle.

1. In valuation, model the reinvestment required to sustain forecast growth and terminal earning power instead of assuming depreciation automatically equals maintenance capex.

## Required evidence and model bridge

- Primary-source set: audited statements, footnotes, accounting policies, roll-forwards, segment disclosures. Preserve exact document/version, date, period, and source location for every material factual input used in capital expenditures, depreciation, and asset intensity.

- For each key concept - PP&E roll-forward, maintenance versus growth capex, useful lives, capacity, capitalized software, construction-in-progress - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as capital expenditures, depreciation, and asset intensity may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| capex intensity | Capital expenditures divided by revenue, or by capacity/output for asset-heavy sectors; separate maintenance and growth capex. | capex intensity: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |
| capex/depreciation | Capital expenditures divided by depreciation and amortization for the same asset base and period; interpret with asset age, inflation, and growth investment. | capex/depreciation: Tie the dollar measure to filed statements/footnotes; reconcile classification adjustments, one-time items, acquisitions/FX, and period consistency before using it analytically. |
| incremental ROIC | ROIC = NOPAT / average invested capital | incremental ROIC: Recalculate incremental ROIC from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |



## Worked application

> Case: a data-center company spends heavily on new capacity while reporting strong FCF.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For capital expenditures, depreciation, and asset intensity, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through PP&E roll-forward, maintenance versus growth capex, useful lives, capacity, then identify which link is directly observed and which link remains an assumption.

- Calculate capex intensity, capex/depreciation, incremental ROIC from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for capital expenditures, depreciation, and asset intensity: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: tie capex to physical capacity, commissioning, utilization, and the return on the new investment.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the capital expenditures, depreciation, and asset intensity conclusion.

## Failure tests

- FAIL if PP&E roll-forward cannot be defined and reproduced from the source pack.

- FAIL if maintenance and growth investment are not separated where material, or if the capex/depreciation roll-forward cannot reconcile to productive capacity and cash.

- FAIL if the capital expenditures, depreciation, and asset intensity conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the capital expenditures, depreciation, and asset intensity conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the capital expenditures, depreciation, and asset intensity conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.