Why is assessing capital expenditures critical in evaluating a company's financial condition?

Assessing capital expenditures is critical in evaluating a company's financial condition because they can lead to cash-flow negative situations. Capital expenditures, or CapEx, typically involve significant investments in physical assets such as property, buildings, and equipment. When a company allocates a large portion of its cash flow to these expenditures, it can restrict its available cash for other operational needs, potentially leading to negative cash flow. This situation may arise especially if the investments do not result in immediate revenue or if the company's existing cash flows are insufficient to support these investments.

Understanding this aspect of capital expenditures provides insight into how well a company is managing its investments and financing structure, as well as its capacity to sustain day-to-day operations without encountering liquidity issues. Hence, evaluating capital expenditures is crucial for stakeholders who are interested in a comprehensive view of the company's financial health and operational viability.