�ݺ�ߣ

Free Cash Flow, Capital
Expenditures and Tax
By Jae Jun
Photo credit: epSos.de / Foter / CC BYwww.oldschoolvalue.com

Foreword
Photo credit: Today is a good day / Foter / CC BY-NC-ND

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

before moving onto the future
posts on balance and income
statements.
Photo credit: Brother O'Mara / Foter / CC BY-NC-ND

If a company receives a tax
deduction when employees
exercise their stock options,
Photo credit: George Eastman House / Foter / No known copyright restrictions

does this count as cash from
operating activities?
Photo credit: KellarW / Foter / CC BY

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

I don’t think so.
Photo credit: guercio / Foter / CC BY-NC-ND

What You Will Learn
Photo credit: Mark Brannan / Foter / CC BY-NC-SA

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

Disclosure
Photo credit: Vox Efx / Foter / CC BY

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

Free Cash Flow
Capital Expenditures
Photo credit: 401(K) 2013 / Foter / CC BY-SA

The FCF is supposed to be
derived from the operations of
the business.
Photo credit: Images_of_Money / Foter / CC BY

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

Capital Expenditure
Adjustments
Photo credit: David Gallagher / Foter / CC BY-NC-SA

I would say the most difficult
aspect of trying to calculate
FCF is
Photo credit: Ahmad Nawawi / Foter / CC BY-NC-ND

determining the amount of
capital expenditure used to
maintain operations and
Photo credit: Museumsfoto / Foter / CC BY

market position versus the
amount used for growth.
Photo credit: heanster / Foter / CC BY-NC-SA

A simple example would be to
think of a retailer like Wal-Mart.
Photo credit: Foter / CC BY-SA

In 2008, Wal-Mart spent $14.9
billion on capital expenditure.
Photo credit: xddorox / Foter / CC BY

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

A certain percentage was used
to maintain its current stores.
Photo credit: JeepersMedia / Foter / CC BY

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-

The point is to find (or
estimate) how much of the
company’s capex is for
maintenance which should
then be subtracted from Cash
From Operations,
Photo credit: tkamenick / Foter / CC BY-NC-ND

whereas the capex used for
growth should not be
subtracted.
Photo credit: budcaddell / Foter / CC BY-NC-SA

Calculating these numbers is
much easier said than done.
Photo credit: Internet Archive Book Images /Foter / No known copyright restrictions

If you don’t feel inclined to go
through so much data (like
myself),
Photo credit: bionicteaching / Foter / CC BY-NC

simply subtracting the given
cap ex is an accepted and
conservative practice.
Photo credit: woodleywonderworks / Foter / CC BY-NC

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

Understanding the
Industry and
Company
Photo credit: Georgie Pauwels / Foter / CC BY

Positive FCF for every
company is not possible. That
doesn’t mean a company with
negative FCF is bad.
Photo credit: bluekdesign / Foter / CC BY-SA

Positive FCF for every
company is not possible. That
doesn’t mean a company with
negative FCF is bad.
Photo credit: griseldangelo1 / Foter / CC BY-NC-SA

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

A cyclical industry and high
cap ex business, yet it’s able
to throw off huge amounts of
FCF.
Photo credit: Free Grunge Textures - www.freestock.ca/ Foter / CC BY

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

Conclusion
Photo credit: squeezeomatic / Foter / CC BY

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

Stick with the cash that comes
from operations rather than
one time occurrences.
Photo credit: quinn.anya / Foter / CC BY-SA

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

It’s always a good idea to
understand the business’s
cash strategy.
Photo credit: Rochelle, just rochelle / Foter / CC BY

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.

�ݺ�ߣ

Free Cash Flow, Capital Expenditures and Tax

More Related Content

Free Cash Flow, Capital Expenditures and Tax