Maintenance capex can be considered the cost of sustaining current revenue and profits for a business. This type of outlay is equivalent to a normal operating expense; such an example would be the replacement of a truck tyre at a haulage firm.
Whereas growth capex should be considered as an investment made for the purpose of increasing revenue and profits, organically (i.e. not through acquisitions). Examples being the construction of a new plant to increase capacity or new stores for an expanding retailer.
The lines can however become blurred between the two distinctions. This is certainly the case with advertising, where ongoing brand advertising campaigns are important in sustaining awareness - a maintenance capex cost- whilst also influencing a new generation of consumers – growth capex. Research and development (R&D) costs are similar, as some expenses are necessary to maintain a business, whilst others are best viewed as investments in future growth.
Why does this matter? Well, it’s necessary to differentiate capital expenditures in order to understand the underlying cash flows of a business when it is not growing, and this is important in calculating the intrinsic value of a business in status quo. But the concept of cash flows and valuation is a story for another time…
