Why is an increase in capital expenditures generally perceived negatively for DCF valuations?

An increase in capital expenditures is generally perceived negatively in DCF valuations because it leads to a decrease in free cash flow. Free cash flow is an essential measure for determining how much cash a company generates after accounting for capital expenditures necessary to maintain or expand its asset base. When a company invests more in capital expenditures, it immediately reduces the cash available for shareholders and other uses, which can signal to investors that the company may not have as much liquidity available for dividends, stock buybacks, or debt repayments in the short term.

This decrease in free cash flow is particularly important in DCF analysis because the valuation relies on projecting future cash flows. If projected cash flows are lower due to higher capital spending, the intrinsic value of the company, as derived from those cash flows, also declines. While increased capital expenditures can be vital for growth and long-term profitability, the immediate impact on free cash flow is what primarily raises concerns among investors in a DCF context.