In what scenario might a company maintain a high ratio of capex to depreciation?

A high ratio of capital expenditures (capex) to depreciation often signifies that a company is making substantial investments in its long-term assets relative to the assets it is currently writing off through depreciation. This scenario is typically observed during high-growth phases when a company is aggressively investing to expand its operations, enhance production capacity, or modernize its facilities to meet increasing demand.

When a company is in a high-growth phase, it recognizes the necessity of investing in new equipment, technology, or expansion to capitalize on market opportunities and sustain its growth trajectory. These investments may not yet be fully reflected in the depreciation expense figures, which tend to lag behind the actual capital investments. As a result, the capex figure may significantly exceed depreciation during such periods, resulting in a high capex-to-depreciation ratio. This reflects the company's proactive approach to preparing for future demand and competitive positioning.

Other scenarios, such as declining growth or operating with minimal assets, would not typically support a high capex-to-depreciation ratio since companies in those situations often prioritize cost-cutting or maintaining existing assets rather than making large capital investments. Similarly, during stable revenue phases, the focus tends to lean more towards sustainable operations rather than aggressive capital expenditures, which would keep the ratio lower.