Capital expenditure (capex) is the cash a company spends on buildings, equipment, and other long-lived assets. It comes in two kinds:
• Maintenance capex: what it takes to keep the business at its current size. The financial statements do not separate this out, so for mature businesses it is roughly estimated using depreciation and amortization. • Growth capex: what it takes to expand. This only makes sense if the new spending earns back more than the cost of the money.
The capex reported on the cash flow statement is the two added together. Buffett and Clark use it as a quality test: a business that spends under 50% of its net income on capex year after year tends to have a durable advantage, and under 25% is the mark of a really strong one. It means the company does not have to plow most of its earnings back in just to stay in the game.