No, capital expenditures are not included in EBITDA. The metric is built to strip capital investment out of the earnings picture: it adds back depreciation and amortization, which are the only way past CapEx shows up on the income statement in the first place, and it never touches the original cash outlay for equipment or buildings, which lives on the cash flow statement instead. That exclusion is the whole point of EBITDA, and it is also the single biggest reason EBITDA can mislead you if you stop there.
Where CapEx Actually Lives on the Financial Statements
Capital expenditures are the money a company spends to acquire, build, or significantly improve long-term assets: property, factories, vehicles, major software systems. When the check is written, cash leaves the bank immediately, but the income statement doesn’t take the hit. The full cost goes onto the balance sheet as an asset, and only a fraction flows through the income statement each year as depreciation.
That is why CapEx never appears on the income statement. It shows up in the investing activities section of the cash flow statement as a cash outflow in the period the money was actually spent. The income statement sees only the depreciation charge, spread across the asset’s useful life.
EBITDA is built from income statement figures. Earnings Before Interest, Taxes, Depreciation, and Amortization starts with net income and adds back those four items, or starts with operating income and adds back only depreciation and amortization. Either way, the calculation lives entirely on the income statement, and CapEx was never there to begin with.
Why EBITDA Is Designed to Exclude CapEx
The first reason is mechanical: avoiding a double-count. When a company spends $10 million on a machine, that cost already flows through net income over time as annual depreciation. EBITDA adds those depreciation charges back. Subtracting the original $10 million on top of that would penalize the company twice for the same investment.
The second reason is the design goal. EBITDA is meant to isolate operating performance from investment decisions. A company that just finished building a new factory and a competitor that finished its expansion five years ago may run near-identical day-to-day operations, but their income statements look very different depending on where each sits in its capital spending cycle. EBITDA levels that by ignoring both the cash outflow and the depreciation it produces.
One SEC filing described the metric 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 Comparability is the benefit. The cost is that EBITDA treats depreciation as an accounting fiction when the underlying assets are real and genuinely wear out.
What the Exclusion Hides
A trucking fleet eventually needs replacing. Manufacturing equipment breaks down. Depreciation is an imperfect but genuine attempt to reflect that ongoing consumption of productive capacity. When EBITDA adds it back, the implicit assumption is that assets will last forever with no reinvestment. For capital-intensive businesses, the gap between EBITDA and the cash actually available to investors can be enormous.
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.
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 to distribute or reinvest; Company B has roughly $15 million. EBITDA alone hides that gap completely.
Maintenance CapEx vs. Growth CapEx
The financial statements treat all CapEx identically, but the analytical distinction matters. Maintenance CapEx is the minimum spending needed to keep existing operations running, replacing worn-out equipment and preventing erosion of productive capacity. Growth CapEx funds expansion: a new warehouse, an additional production line, entry into a new market. Analysts who don’t separate the two will struggle to forecast how much of a company’s earnings are truly available to shareholders versus locked into keeping the lights on.
A Quick Check: CapEx vs. Depreciation
The CapEx-to-depreciation ratio is a fast way to see whether a company is reinvesting enough. 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 catches up eventually.
Free Cash Flow Fills the Gap
Free cash flow exists to solve the problem EBITDA creates. The most common formula starts with operating cash flow and subtracts total capital expenditures. The result shows how much cash the business actually generated after paying for both its 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 purposes, FCF is generally the more honest number because it reflects the 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 is not inherently bad; utilities and telecoms operate this way by nature. But it means a smaller share of each dollar of operating earnings actually reaches investors. Asset-light businesses like software and professional services convert a much larger percentage of EBITDA into FCF, which is one reason they often trade at higher valuation multiples.
EBITDA Minus Maintenance CapEx
Some analysts prefer a middle path: subtracting only maintenance CapEx from EBITDA while leaving growth CapEx out. 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. This produces a figure closer to the “owner earnings” concept Buffett has advocated.
The practical challenge is that companies rarely disclose the split. Most cash flow statements report a single CapEx line. 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. That proxy breaks down when replacement costs have risen significantly or when the asset base is growing, but it is the most common starting point.
What This Means for Valuation
The EV/EBITDA multiple is one of the most widely used valuation tools in corporate finance. Enterprise value divided by EBITDA produces a ratio that lets analysts compare companies regardless of how they’re financed or how old their assets are. It is preferred over price-to-earnings ratios in many contexts because it is capital-structure neutral.
The CapEx exclusion is 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 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.
Adjusted EBITDA Still Doesn’t Include CapEx
Many companies report “Adjusted EBITDA” in earnings releases, layering additional add-backs on top of the standard formula: stock-based compensation, restructuring charges, litigation costs, 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 these adjustments bring CapEx into the number. The adjustments are to the earnings figure, not the capital spending figure. However, due diligence sometimes touches CapEx indirectly. If an owner expensed a major equipment purchase as a repair to reduce taxable income, a buyer’s quality-of-earnings analysis will reclassify it as CapEx, which increases historical EBITDA while also increasing the true capital spending baseline. Getting that reclassification right can swing a deal’s valuation significantly.
The Lease Accounting Trap
Lease accounting under ASC 842 adds a wrinkle that catches even experienced analysts. Operating leases are expensed on a straight-line basis on the income statement, so they reduce EBITDA the way they always did. Finance leases are different: the lease payment is split into a depreciation component and an interest component, and both 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. 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. Read the footnotes before you trust the comparison.