Module I· PP&E, Capex & D&AIntermediate
Question
What is the capex-as-maintenance indicator, and how do you use the capex / D&A ratio?
Answer
Mechanics
The capex / D&A ratio is a standard indicator of the investment cycle:
| Ratio | Interpretation |
|---|---|
| = 1.0 | Steady state (maintenance capex ≈ D&A) |
| > 1.0 | Growth mode or catch-up needed |
| < 1.0 | Underinvestment, asset base shrinking |
Sector benchmarks (LTM average)
| Sector | Capex / D&A |
|---|---|
| Mature industrials | 1.0–1.3x |
| Growing tech | 0.5–1.0x (low PP&E base) |
| Telcos / utilities | 1.2–1.8x during investment phases (5G rollout, grid), 0.8–1.2x otherwise |
| Capital-intensive manufacturing (automotive, steel) | 1.0–1.5x |
Deep diveShow more details
Application in IB
- Valuation plausibility: If a target shows capex / D&A < 0.8 for 3+ years, the valuation should build a capex catch-up into the forecast — otherwise it is too optimistic.
- PE acquisition logic: Underinvestment targets offer value creation through capex restoration; clearing deferred maintenance reduces operating risk.
Pitch tip
'The target shows capex / D&A of 0.7 over the last 3 years — the valuation is adjusted for $30m of catch-up capex over years 1–3, reducing PV by $25m'.