Free Cash Flow, Capital Expenditures and Tax

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  1. 1. Free Cash Flow, Capital Expenditures and Tax By Jae Jun Photo credit: epSos.de / Foter / CC BYwww.oldschoolvalue.com
  2. 2. Foreword Photo credit: Today is a good day / Foter / CC BY-NC-ND
  3. 3. I wanted to add some additional points on FCF which I brought up in analysing the Statement of Cash Flows Photo credit: @Doug88888 / Foter / CC BY-NC-SA
  4. 4. before moving onto the future posts on balance and income statements. Photo credit: Brother O'Mara / Foter / CC BY-NC-ND
  5. 5. If a company receives a tax deduction when employees exercise their stock options, Photo credit: George Eastman House / Foter / No known copyright restrictions
  6. 6. does this count as cash from operating activities? Photo credit: KellarW / Foter / CC BY
  7. 7. Or if the company defers its income taxes to a later period, does this count as cash from operations? Photo credit: elagaan / Foter / CC BY-NC-SA
  8. 8. I dont think so. Photo credit: guercio / Foter / CC BY-NC-ND
  9. 9. What You Will Learn Photo credit: Mark Brannan / Foter / CC BY-NC-SA
  10. 10. Photo credit: Etrusia UK / Foter / CC BY-NC-SA What is cash flow The use of FCF How to use CAPEX The effect of positive FCF
  11. 11. Disclosure Photo credit: Vox Efx / Foter / CC BY
  12. 12. I wanted to add some additional points on FCF which I brought up in the Cash Flow Statement analysis before moving onto the future posts on balance and income statements. Photo credit: Mark Dries / Foter / CC BY-NC-ND
  13. 13. Free Cash Flow Capital Expenditures Photo credit: 401(K) 2013 / Foter / CC BY-SA
  14. 14. The FCF is supposed to be derived from the operations of the business. Photo credit: Images_of_Money / Foter / CC BY
  15. 15. In the updated version of the intrinsic value spreadsheet, the FCF number now subtracts deferred taxes and others. Photo credit: rbbaird / Foter / CC BY-NC
  16. 16. Capital Expenditure Adjustments Photo credit: David Gallagher / Foter / CC BY-NC-SA
  17. 17. I would say the most difficult aspect of trying to calculate FCF is Photo credit: Ahmad Nawawi / Foter / CC BY-NC-ND
  18. 18. determining the amount of capital expenditure used to maintain operations and Photo credit: Museumsfoto / Foter / CC BY
  19. 19. market position versus the amount used for growth. Photo credit: heanster / Foter / CC BY-NC-SA
  20. 20. A simple example would be to think of a retailer like Wal-Mart. Photo credit: Foter / CC BY-SA
  21. 21. In 2008, Wal-Mart spent $14.9 billion on capital expenditure. Photo credit: xddorox / Foter / CC BY
  22. 22. Of that $14.9 billion, 100% of it did not go to opening new stores or expanding to new emerging markets. Photo credit: Erik Charlton / Foter / CC BY
  23. 23. A certain percentage was used to maintain its current stores. Photo credit: JeepersMedia / Foter / CC BY
  24. 24. The shelves have to be filled, maybe the plumbing needed to be fixed or the walls had to be repainted. Photo credit: Bill Kramme / Foter / CC BY-NC-
  25. 25. The point is to find (or estimate) how much of the companys capex is for maintenance which should then be subtracted from Cash From Operations, Photo credit: tkamenick / Foter / CC BY-NC-ND
  26. 26. whereas the capex used for growth should not be subtracted. Photo credit: budcaddell / Foter / CC BY-NC-SA
  27. 27. Calculating these numbers is much easier said than done. Photo credit: Internet Archive Book Images /Foter / No known copyright restrictions
  28. 28. If you dont feel inclined to go through so much data (like myself), Photo credit: bionicteaching / Foter / CC BY-NC
  29. 29. simply subtracting the given cap ex is an accepted and conservative practice. Photo credit: woodleywonderworks / Foter / CC BY-NC
  30. 30. The reason people go to such lengths to find maintenance cap ex is to find value a majority of investors cannot see. Photo credit: hans s / Foter / CC BY-ND
  31. 31. Understanding the Industry and Company Photo credit: Georgie Pauwels / Foter / CC BY
  32. 32. Positive FCF for every company is not possible. That doesnt mean a company with negative FCF is bad. Photo credit: bluekdesign / Foter / CC BY-SA
  33. 33. Positive FCF for every company is not possible. That doesnt mean a company with negative FCF is bad. Photo credit: griseldangelo1 / Foter / CC BY-NC-SA
  34. 34. One example is the oil industry and within that industry, take a look at Transocean (RIG). Photo credit: Brendan Biele / Foter / CC BY-NC-SA
  35. 35. A cyclical industry and high cap ex business, yet its able to throw off huge amounts of FCF. Photo credit: Free Grunge Textures - www.freestock.ca/ Foter / CC BY
  36. 36. Transocean and most oil drilling companies forego FCF in the short term to create immense shareholder value in the future. Photo credit: Eric Constantineau - www.ericconstantineau.com / Foter / CC BY-NC
  37. 37. Conclusion Photo credit: squeezeomatic / Foter / CC BY
  38. 38. Cash is a fact but there are lots of items which can be left out or moved to another section of the statements. Photo credit: Tax Credits / Foter / CC BY
  39. 39. Stick with the cash that comes from operations rather than one time occurrences. Photo credit: quinn.anya / Foter / CC BY-SA
  40. 40. Going the full length to find the real maintenance cap ex will give you more investment opportunities. Photo credit: pjchmiel / Foter / CC BY-NC-ND
  41. 41. Its always a good idea to understand the businesss cash strategy. Photo credit: Rochelle, just rochelle / Foter / CC BY
  42. 42. Old School Value Jae Jun (jae.jun@oldschoolvalue.com) http://www.oldschoolvalue.com Old School Value improves your investment decisions and performs deep fundamental analysis and valuation for you. Just like a personal stock analyst.