Capital Expenditure Ratio (CER) is one of the key indicators helping assess the prospects of business. It is widely used to analyze the investment attractiveness.
Alternate names of the Capital Expenditure Ratio:
- Capital Expenditure Ratio
- CapexCR – Capital Expenditure Coverage Ratio
What Does the Capital Expenditure Ratio Show?
The indicator reflects the ability of an enterprise to finance its own capital expenditures at the expense of the operating activity and pay off the dividends, if any. Capital expenditures are the investment cash outflows aimed at the renewal of the fixed capital. The indicator is taken into account by investors considering the company as a long-term investment.
Formula of the Capital Expenditure Ratio
CER = Operating Cash Flow / Capital Expenditures
If the company makes payments to the equity holders, these payments must be made first of all. Therefore, the amount of the operating cash flow is adjusted for the amount of dividends and then compared to the amount of capital expenditures.
CER = (Operating Cash Flow – Dividends) / Capital expenditures
Normative Value of the Capital Expenditure Ratio
If the value of the indicator is exceeds 1, it’s a clear sign the company has sufficient funds to finance its own development. If the value is lower than 1, then the company needs additional funds from the external sources of financing to implement active investment programs in the future.