Capex and Opex

What are capex and opex?

Capex and opex are the two basic types of business spending: capital expenditure (Investitionsausgaben) for assets used over the long term and operating expenditure (laufende Betriebsaufwendungen). Capex is capitalised, that is, recorded in the balance sheet as an asset, and depreciated over its useful life: its costs reduce earnings in equal portions year by year. Opex reduces the earnings of the period in which it is incurred. Buying a delivery van is capex; fuel, insurance and maintenance are opex.

Both terms come from international financial analysis, not from the German Commercial Code (Handelsgesetzbuch, HGB). Under commercial law, capex corresponds to additions to fixed assets, opex to the current operating expenses in the income statement. The term opex is used with varying breadth. In English-language financial statements, in the narrower sense it covers only sales, administration and development costs, excluding the direct costs of the services sold. When set against capex, it usually means all current operating expenses. The distinction determines whether an expense reduces EBITDA (earnings before interest, taxes, depreciation and amortisation). That is why it matters in the financial model, in loan agreements, in due diligence and in business valuation.

Difference between capex and opex: capitalisation or expense

Whether an expenditure is capex or opex is decided in Germany by accounting law. Fixed assets are recognised at their acquisition or production cost (Section 255 HGB) and depreciated on a straight-line basis over their expected useful life (Section 253(3) HGB). Production costs also include expenditure on an extension or a substantial improvement beyond the original condition. Maintenance, repairs and ongoing care, by contrast, are maintenance expense and therefore opex. Typical examples in a software company:

• Capex: servers and office equipment, software licences acquired for a one-off payment, capitalised development costs for own software.
• Opex: salaries, cloud hosting, software subscriptions, rent, marketing, travel costs as well as maintenance and repairs.

For tax purposes, low-value assets, that is, movable fixed assets with low acquisition costs, can be deducted immediately under Section 6(2) of the German Income Tax Act (EStG); the value limits follow from the version in force at the time. For computer hardware and software, the tax administration has allowed a useful life of one year since 2021. Under commercial law, the expected actual useful life remains decisive, so the commercial balance sheet and the tax balance sheet can diverge here.

Effect on EBITDA, cash flow and valuation

Opex reduces EBITDA in full. Capex does not affect EBITDA; it acts on EBIT and net income for the year only through depreciation, which sits below EBITDA. In the cash flow statement, opex appears in operating cash flow, capex in cash flow from investing activities. The cash outflow is the same in both cases. Investors and buyers therefore use not only EBITDA but also free cash flow, which contains both types of expenditure, to assess earning power.

For valuation, the split of capex is important. Maintenance capex is needed to continue the existing business; growth capex finances additional growth and must justify itself through its return (return on investment). If a company is valued with an EBITDA multiple, buyers mentally reduce EBITDA by maintenance capex or compare the multiple with the investment ratio of comparable companies. Capital-light business models are often valued higher because they tie up less capital for each additional euro of revenue. In loan agreements, banks not infrequently limit annual capex through a covenant.

Software development costs

For internally generated intangible fixed assets, such as own software, there is under Section 248(2) HGB an option to capitalise. Only development costs can be capitalised, not research costs. The prerequisite is that an asset will arise with high probability and that the research and development phases can be reliably separated; if separation fails, capitalisation is excluded. Capitalised amounts are subject to a distribution block, that is, they may not be distributed to the shareholders as profit (Section 268(8) HGB). For tax purposes, there is a ban on capitalisation under Section 5(2) EStG, so the expense reduces taxable profit immediately.

In due diligence, buyers treat capitalised development costs economically like running costs, because they are predominantly salaries that recur every year. The consistency of the capitalisation policy over the years and its basis are examined, above all project-related time recording (timesheets). Purchased licences that can be used permanently are capex. Software subscriptions and cloud services are opex, because no asset of its own is acquired.

Rent and leasing

Rent is opex. For leasing, classification under the HGB and tax law depends on to whom the leased asset is to be attributed economically. Under the leasing decrees of the tax administration, this is generally the lessor; the lessee then records the instalments as an expense. Exceptions apply if the non-cancellable basic lease term is less than 40% or more than 90% of the customary useful life, or if purchase and extension options make the lessee the economic owner. The lessee then recognises the asset on its balance sheet and at the same time shows a liability.

Under IFRS 16, the international accounting standard for leases, lessees by contrast recognise almost all leases as a right-of-use asset with a lease liability. Depreciation and interest expense take the place of rent expense, and EBITDA rises accordingly. If a target company reporting under the HGB is compared with peer companies reporting under IFRS, this difference must be adjusted. In a company acquisition, the parties negotiate whether lease liabilities are deducted from the purchase price as debt-like items.

Worked example: capex or opex for development costs

A software GmbH (German limited liability company) has personnel expenses for development of EUR 1,200,000 in the financial year. Of this, EUR 700,000 relates to a new product module that meets the conditions for capitalisation. Without capitalisation, EBITDA is EUR 500,000. The module is completed at year-end and depreciated over five years from the following year.

• Without capitalisation: EBITDA EUR 500,000, the entire EUR 1,200,000 is opex
• With capitalisation: EUR 700,000 is recorded as other own work capitalised, EBITDA 500,000 + 700,000 = EUR 1,200,000
• Depreciation from the following year: 700,000 / 5 = EUR 140,000 per year, which reduces EBIT but not EBITDA
• Liquidity: in both cases EUR 1,200,000 of salaries flows out. With capitalisation, operating cash flow is EUR 700,000 higher and cash flow from investing activities EUR 700,000 lower; free cash flow stays the same
• Valuation at an assumed multiple of 8: without capitalisation 8 × 500,000 = EUR 4,000,000, with capitalisation 8 × 1,200,000 = EUR 9,600,000
• Difference in the calculated enterprise value: 9,600,000 minus 4,000,000 = EUR 5,600,000 with an unchanged payment stream

No buyer takes on this difference unchecked. The buyer values on the basis of an EBITDA in which the capitalised development costs are treated as an expense, or applies a correspondingly lower multiple to the higher EBITDA. Anyone who goes into the negotiation with the higher value loses the difference in due diligence at the latest.

Distinction: depreciation, working capital, burn rate and totex

• Depreciation: the spreading of capex over the useful life. For intangible assets, English speaks of amortization, see Amortization.
• Working capital: capital tied up in inventories and receivables less liabilities from ongoing business. If it rises, it reduces free cash flow alongside capex.
• Burn rate: the monthly cash consumption. It contains opex and capex alike, because both cost liquidity.
• Adjusted EBITDA: EBITDA corrected for one-off effects. Whether capitalised development costs are deducted again in the process is one of the most frequent points of dispute in purchase price negotiations.
• Totex: the sum of capex and opex (total expenditure). The overall view prevents a mere shift between the two types from appearing as a saving, for example when own servers are replaced by cloud services.

Common mistakes

• Confusing earnings and liquidity. An investment burdens liquidity immediately, but earnings only over the years of depreciation.
• Capitalisation without documentation. Without project-related time recording and a clear separation of research and development, capitalisation cannot be justified to either the auditor or a buyer.
• Changing the capitalisation policy. Anyone who capitalises development costs only in the year before the sale creates a jump in earnings that every buyer strips out.
• Underestimating maintenance investments. A plan that provides capex only for growth overstates the free cash flow of the existing business.
• Treating leasing inconsistently. If lease instalments are carried as opex in the budget but below EBITDA in the comparison with IFRS companies, the metrics are not comparable.

Frequently asked questions

Is a software subscription capex or opex?

Opex. A subscription grants a right of use for a period but no asset of its own. Capex, by contrast, is typically a permanently usable licence acquired for a one-off payment.

Must development costs be capitalised under the HGB?

No. For internally generated intangible fixed assets there is an option, which must be exercised consistently. For tax purposes, capitalisation is excluded.

Why does IFRS 16 increase EBITDA?

Because the rent expense for leases falls away. In its place come depreciation of the right-of-use asset and interest on the lease liability, both of which sit below EBITDA.

What is maintenance capex?

The part of investment needed to keep the existing business at its current level, for example the replacement of hardware. It belongs economically to running costs and is treated accordingly in valuation.

Is buying or renting cheaper for a growth company?

This cannot be answered in general. What is compared is the total cost over the useful life (total cost of ownership). Renting and leasing preserve liquidity but often cause higher total costs over the whole term. As long as liquidity is the bottleneck, the lower capital requirement usually weighs more heavily.

The Roemer Capital view

In the financial models we build for clients, we show investments separately from running costs and display their effect on EBITDA, free cash flow and runway side by side. A frequent planning error is an investment that appears as depreciation in the earnings plan but is missing in the liquidity plan.

For companies that capitalise development costs, we present EBITDA to investors and buyers from the start in both versions, with and without capitalisation. This takes the surprise out of a foreseeable adjustment and shifts the negotiation to the question of what the company actually generates in liquidity.