What are 'capital expenditures' (CapEx)?

Capital expenditures, or CapEx, specifically refer to the funds a company allocates to acquire, upgrade, or maintain physical assets, such as property, buildings, machinery, or equipment. These expenditures are essential for long-term growth and expansion, as they improve a company's efficiency and capability to produce goods or services.

The defining characteristic of capital expenditures is that they provide benefits over multiple accounting periods, as opposed to simply being an expense that is incurred in the current period. Unlike operating costs, which are necessary for day-to-day business operations, CapEx investment is focused on the long-term enhancement of the asset base. This reflects a strategic commitment to sustaining and boosting future productivity and profitability.

In contrast, other options like paying long-term debts pertain to financing activities rather than spending on physical assets. Operating costs are short-term and necessary for day-to-day operations rather than investments in future capability. Investments in stock trading are financial investment decisions unrelated to purchasing or improving physical assets. Thus, option B accurately captures the essence of capital expenditures.