# Are capital expenditures included in EBITDA?

No, capital expenditures relate to the purchase of physical assets/equipment for the business. The cost is capitalized into PP&E and then depreciated over the useful life of the asset.

Since depreciation expenses is added back to net income to calculate EBITDA, then capital expenditures are excluded.

However, capital expenditures are included in the investing section of the cash flow statement (#1 below).

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• ### How to calculate EBITDA?

EBITDA is a company’s net income but excludes the impact of interest income or expense related to debt instruments, depreciation and amortization, and stated and federal income taxes. The whole point of calculating EBITDA is to better understand a company’s GAAP cash flow. The reason we exclude depreciation and amortization is because it is not an actual cash expense. Additionally, we exclude interest expense and income tax expense because that is based solely on the company’s capital structure. To calculate EBITDA, start with the company’s reported net income, add back interest expense (net of interest income), add back state and federal income taxes, and add back depreciation and amortization expense. So as you can see in the example below, our starting point would be net income. We would then add back depreciation and amortization, interest expense, and income taxes.

• ### What is Capex?

Capex is short for “capital expenditures”. A capital expenditure is when the company purchases physical assets either for cash or on credit (assume liability). Capital expenditures can be classified as either for the purpose of growth or maintenance. For example, if the company needs to replace a machine, then that would be considered maintenance capex. If the company purchases a machine to expand into a new line of business, that would be considered growth capex. Capex is capitalized and then expensed through depreciation, so capex is not included in EBITDA. However, capex is typically deduced from EBITDA to get to free cash flow (i.e. free cash flow bridge) since it is a cash expense that the company will incur (at some level) on an annual basis.

• ### How to calculate free cash flow?

Free cash flow represents cash generated by the company through the income statement, but also needs to factor in changes in net working capital, capital expenditures, and other cash flow items. Unlevered free cash flow represents cash the company generates or losses prior to factoring in interest on debt, as well as state and federal income taxes. Free cash flow is a key metric as it helps a company understand if they can pay their debt on a monthly/quarterly/annual basis.