Capital expenditures are not included in EBITDA. The metric is built to strip out the effects of long-term capital investment, so the original cash spent on equipment, buildings, or other long-lived assets never enters the calculation. EBITDA adds back depreciation and amortization to earnings, which reverses the way past capital spending would otherwise flow through the income statement. If you’re asking whether CapEx is included in EBITDA, the short answer is no, and the longer answer is that the exclusion is the whole point of the metric.
Where CapEx Actually Shows Up
Capital expenditures are the money a company spends to acquire, build, or significantly improve long-term assets: property, factories, vehicles, major software systems. When a business buys a piece of equipment, cash leaves the account immediately, but the expense doesn’t hit the income statement all at once. The full cost lands on the balance sheet as an asset, and the income statement recognizes only a slice of that cost each year through depreciation.
That’s why CapEx doesn’t appear on the income statement at all. It sits in the investing activities section of the cash flow statement, reported as a cash outflow in the period the money was actually spent. The income statement sees only the annual depreciation charge, spread across the asset’s useful life.
EBITDA is derived from the income statement. It starts with net income and adds back interest, taxes, depreciation, and amortization, or it starts with operating income and adds back only depreciation and amortization. Both paths land at the same figure. Because CapEx never touches the income statement in the first place, it has nothing to be added back or subtracted from within an EBITDA calculation.
Why the Exclusion Is Deliberate
Two reasons drive the design choice.
The first is arithmetic. When a company spends $10 million on a machine, that cost already reduces net income over time through annual depreciation charges. EBITDA adds those depreciation charges back. If you also subtracted the original $10 million cash outlay somewhere in the calculation, you’d be penalizing the company twice for the same investment: once through depreciation hitting net income, and again through a direct cash subtraction. The exclusion prevents that double-count.
The second reason is comparability. EBITDA is meant to isolate operating performance from investment decisions. A company that just finished a new factory and a competitor that completed its expansion five years ago might have identical day-to-day operations, but their income statements will look very different because of where each sits in its capital spending cycle. EBITDA flattens that difference by ignoring both the cash outflow and the resulting depreciation. One SEC filing described the goal as “a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.”1U.S. Securities and Exchange Commission. Mirant Corporation Explanation of Non-GAAP Financial Measures
That comparability is useful. It also creates the metric’s biggest blind spot.
What the Exclusion Hides
EBITDA treats depreciation as an accounting fiction, but the assets being depreciated are real, and they wear out. A trucking company’s fleet will eventually need replacing. A manufacturer’s equipment will break down. The depreciation charge is an imperfect but genuine attempt to reflect the ongoing consumption of productive capacity. Adding it back implicitly assumes the assets will last forever without reinvestment.
Warren Buffett has been one of the most vocal critics on this point. In his annual letters to Berkshire Hathaway shareholders, he has argued that EBITDA is not a true representation of financial performance precisely because it ignores capital expenditures and the real economic cost of asset deterioration.
The gap can be enormous. Consider two companies, each generating $50 million in EBITDA. Company A is a software firm that spends $2 million a year on servers and office equipment. Company B is an oil producer that must spend $35 million annually just to maintain current production levels. On an EBITDA basis they look equally profitable. In reality, Company A has $48 million in cash available to distribute or reinvest, while Company B has roughly $15 million. EBITDA alone hides that difference entirely.
The CapEx-to-depreciation ratio is one of the simplest checks. Data from NYU Stern’s annual industry survey shows utilities routinely spend two to three times their depreciation charges on new capital investment, while many service businesses spend well below their depreciation levels. A company spending significantly less on CapEx than it records in depreciation may be coasting on aging assets, and that eventually catches up.
How Analysts Bridge the Gap
Free cash flow exists to solve the problem EBITDA creates. Where EBITDA ignores CapEx entirely, FCF subtracts it. The common formula starts with operating cash flow from the cash flow statement and takes out total capital expenditures. The result shows how much cash the business actually generated after paying for both operations and the capital investment needed to support them.
If EBITDA tells you what the business earned before anyone had to write a check for new equipment, FCF tells you what was left after that check cleared. For valuation, FCF is generally the more honest number. It reflects cash genuinely available to pay down debt, fund dividends, buy back shares, or pursue acquisitions.
A persistent gap between high EBITDA and low FCF is the signature of a capital-intensive business. That’s not automatically bad. Utilities and telecoms operate this way by nature. It does mean a smaller share of each dollar of operating earnings actually reaches investors, which is one reason asset-light industries like software and professional services often trade at higher valuation multiples.
EBITDA Minus Maintenance CapEx
Some analysts take a middle path: subtract only maintenance CapEx from EBITDA while leaving growth CapEx alone. The logic is that maintenance spending is mandatory to sustain current earnings, while growth spending is discretionary and should increase future earnings enough to justify the outlay. The result approximates the “owner earnings” concept Buffett has advocated.
The practical problem is that companies rarely disclose the split. Most cash flow statements report a single CapEx line covering both maintenance and growth spending. Analysts typically estimate maintenance CapEx using depreciation expense as a rough proxy, on the theory that depreciation approximates the annual cost of replacing aging assets at historical prices. The proxy weakens when replacement costs have risen sharply or when the asset base is growing quickly, but it’s the common starting point. More sophisticated approaches layer in asset write-downs, operating leverage, and industry-specific benchmarks.
Why the Exclusion Matters in Valuation
The EV/EBITDA multiple is one of the most widely used valuation tools in corporate finance and M&A. Enterprise value divided by EBITDA lets analysts compare companies regardless of how they’re financed or how old their assets are. It’s preferred over price-to-earnings ratios in many contexts because it’s capital-structure neutral. A heavily leveraged company and an all-equity company can be compared on operational merit alone.
The CapEx exclusion is exactly where EV/EBITDA can mislead. Two companies trading at 10x EBITDA may look identically valued, but if one converts 80% of its EBITDA to free cash flow and the other converts only 30%, the buyer is getting a fundamentally different deal. Serious acquirers don’t stop at EV/EBITDA. They calculate the implied EV/FCF multiple, adjust for expected maintenance spending, and often pay lower EBITDA multiples for asset-heavy businesses to compensate for the reinvestment drag.
Does Adjusted EBITDA Include CapEx?
No. Many companies report Adjusted EBITDA in earnings releases, and it layers additional add-backs on top of the standard formula. Common adjustments include stock-based compensation, restructuring charges, litigation costs, and one-time expenses like relocation or rebranding. In private company sales, adjusted EBITDA frequently adds back excess owner compensation and discretionary personal expenses run through the business.
None of those adjustments touch CapEx. They modify the earnings figure, not the capital spending figure. Buyer due diligence sometimes touches CapEx indirectly, though. If a company owner expensed a major equipment purchase as a repair to reduce taxable income, a quality-of-earnings analysis will reclassify it as CapEx, which increases historical EBITDA while also raising the true capital spending baseline. Getting that reclassification right can move a deal’s valuation meaningfully.
Where the Line Gets Blurry: Leases
Lease accounting under ASC 842 complicates the EBITDA-versus-CapEx distinction in a way that trips up experienced analysts. Before 2019, operating lease payments were a straightforward operating expense that reduced EBITDA. Under current rules, treatment depends on how the lease is classified.
Operating leases are expensed on a straight-line basis on the income statement, so they continue to reduce EBITDA as they always did. Finance leases split the payment into a depreciation component and an interest component, both of which get added back in the EBITDA calculation. A company that finances equipment through a finance lease rather than buying it outright will show higher EBITDA than an identical company that purchased the same equipment, because the finance lease payments are effectively treated like CapEx for EBITDA purposes. The cost gets added back through depreciation and interest.
Two companies with identical operations, identical equipment, and identical total cash outlays can report different EBITDA figures depending purely on whether they lease or buy, and how those leases are classified. It’s one of the quieter ways that EBITDA’s blindness to capital-related costs distorts comparisons when you don’t read the footnotes.