Hiding in Plain Sight: Accounting for Capex

In both public and private markets, investors often rely on EBITDA and cash flow metrics to assess profitability and value companies. Yet these measures can mask a wide gap between accounting earnings and free cash flow. That gap typically stems from two sources: shifts in working capital and investment cash flows, with CAPEX often the largest driver in capital-intensive industries. Poorly performing projects may even make profits look stronger while cash is being drained.

This blog highlights why ex-post monitoring of capital allocation matters and how investors can detect whether CAPEX is creating or destroying value across different industries.

It is important to note that CAPEX needs vary significantly by sector. Capital-intensive industries such as telecommunications and energy require large recurring investments. Others like software or education are far less dependent on fixed-asset spending. While working capital management is typically monitored closely, far less attention is given to the cash flow conversion of growth CAPEX. This oversight has become especially relevant in recent years as higher interest rates increase the cost of financing large investment programs.

Why CAPEX Monitoring Matters

Growth CAPEX is a long-term capital allocation decision. The challenge for investors is that, once approved and executed, companies rarely disclose whether projects actually deliver the promised returns.

The risk is clear: reported earnings may not fully reflect the cash flow implications of expansion programs. Underperforming investments can make profitability look stronger than it is, while simultaneously reducing the cash available for dividends, buybacks, or debt service.

The earnings–cash flow gap is especially pronounced in capital-intensive sectors like telecom and energy, where large recurring investments are the norm. With higher interest rates raising financing costs, careful monitoring of CAPEX cash conversion has become even more critical.

Disclosure Approaches

Here are a couple of examples of companies that break out CAPEX from total earnings:

• Telecommunications: Spanish telecom giant Telefónica reports earnings before interest, taxes, depreciation, amortization, and special losses (EBITDAaL). This metric incorporates accrued capital expenditures. Management noted in Q2 2025 results, “It is important to consider capital expenditures excluding spectrum acquisitions with EBITDAaL, in order to have a more complete measure of the performance of our telecommunication businesses.” Because Telefónica integrates all CAPEX into this key performance indicator (KPI), even by geography, management and investors can more easily identify when rollouts fail to generate expected cash flows.
• Industrial manufacturing: French transport system manufacturer Alstom disclosed an adjusted net profit to free cash flow conversion ratio but did not report return on capital employed (ROCE) or return on capital invested (ROCI) in its March 2025 annual report. On the other hand, it does track working capital needs on a project-by-project basis, indicating that management monitors cash flow implications at the operating level even if broader capital return metrics are absent.

These examples show how disclosure practices differ across industries, and why investors must adapt their approach depending on the sector and reporting culture.

Investor Red Flags

Investors rarely see management’s internal capital budgeting models, but public disclosures often contain signals worth monitoring:

• Rising leverage at higher cost of capital, particularly when companies rely on private debt funds with variable rates.
• Declining profitability of comparable operations. For example, lower EBITDA per store, business unit, or product category after the ramp-up period may suggest new investments are diluting overall profitability.
• CAPEX growth without sustained improvement in return on invested capital (ROIC).

These signals should always be assessed in conjunction with the Management Discussion & Analysis (MD&A) to separate structural problems from temporary pressures.

What Good Disclosure Looks Like

Strong disclosure practices help investors evaluate capital allocation discipline. Examples include:

• Reporting ROIC or EBITDA checkpoints after the ramp-up period, distinguishing between comparable units and those tied to new CAPEX.
• Providing segment-level CAPEX disclosure linked directly to cash flow outcomes.
• Communicating payback periods for strategic projects.
• Demonstrating improved profitability in the business units where CAPEX has been deployed, ideally with a breakdown of fixed assets by new versus comparable operations.

Conclusion

Shareholder value is not created by the volume of capital deployed, but by a company’s ability to transform those investments into sustainable cash flows. This principle applies across industries, whether in telecom, energy, industrials, or asset-light sectors where CAPEX plays a smaller but still strategic role. For investors, the key is to look beyond earnings and monitor whether CAPEX is being translated into real cash generation. Undisciplined CAPEX inflates balance sheets, but disciplined growth builds resilience and long-term economic return.