Learn all about Free Cash Flow (FCF) and Capital Expenditures and how it can affect your investment decisions.

1. Free Cash Flow, Capital
Expenditures and Tax
By Jae Jun
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2. Foreword
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3. I wanted to add some
additional points on FCF which
I brought up in analysing the
Statement of Cash Flows
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4. before moving onto the future
posts on balance and income
statements.
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5. If a company receives a tax
deduction when employees
exercise their stock options,
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6. does this count as cash from
operating activities?
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7. Or if the company defers its
income taxes to a later period,
does this count as cash from
operations?
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8. I don’t think so.
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9. What You Will Learn
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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. Disclosure
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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.
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13. Free Cash Flow
Capital Expenditures
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14. The FCF is supposed to be
derived from the operations of
the business.
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15. In the updated version of the
intrinsic value spreadsheet,
the FCF number now subtracts
deferred taxes and “others”.
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16. Capital Expenditure
Adjustments
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17. I would say the most difficult
aspect of trying to calculate
FCF is
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18. determining the amount of
capital expenditure used to
maintain operations and
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19. market position versus the
amount used for growth.
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20. A simple example would be to
think of a retailer like Wal-Mart.
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21. In 2008, Wal-Mart spent $14.9
billion on capital expenditure.
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22. Of that $14.9 billion, 100% of it
did not go to opening new
stores or expanding to new
emerging markets.
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23. A certain percentage was used
to maintain its current stores.
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24. The shelves have to be filled,
maybe the plumbing needed to
be fixed or the walls had to be
repainted.
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25. 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,
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26. whereas the capex used for
growth should not be
subtracted.
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27. Calculating these numbers is
much easier said than done.
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28. If you don’t feel inclined to go
through so much data (like
myself),
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29. simply subtracting the given
cap ex is an accepted and
conservative practice.
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30. The reason people go to such
lengths to find maintenance
cap ex is to find value a
majority of investors cannot
see.
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31. Understanding the
Industry and
Company
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32. Positive FCF for every
company is not possible. That
doesn’t mean a company with
negative FCF is bad.
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33. Positive FCF for every
company is not possible. That
doesn’t mean a company with
negative FCF is bad.
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34. One example is the oil industry
and within that industry, take a
look at Transocean (RIG).
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35. A cyclical industry and high
cap ex business, yet it’s able
to throw off huge amounts of
FCF.
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36. Transocean and most oil
drilling companies forego FCF
in the short term to create
immense shareholder value in
the future.
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37. Conclusion
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38. Cash is a fact but there are lots
of items which can be left out
or moved to another section of
the statements.
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39. Stick with the cash that comes
from operations rather than
one time occurrences.
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40. Going the full length to find the
real maintenance cap ex will
give you more investment
opportunities.
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41. It’s always a good idea to
understand the business’s
cash strategy.
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42. Old School Value
Jae Jun (jae.jun@oldschoolvalue.com)
http://www.oldschoolvalue.com
Old School Value improves your
investment decisions and performs
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