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Investing Strategies / It's Earnings That Count


Subject:  Re: First Marblehead @ $32 Date:  11/27/2007  9:36 AM
Author:  hheiserman Number:  1410 of 1817

Joe -

Page 298 of the second edition of Cash Flow and Security Analysis has an excellent section on maintenance capex. My spreadsheet incorporates some of the analytics cited in this book.

A simpler approach is to assume maintenance capex equals: depreciation + (depreciation x 25%). Thus, discretionary capex = total capex - (depreciation + (depreciation x 25%)). Discretionary capex is a source of cash in the defensive income statement.

The reason I use 25% is to take into account the overall rate of inflation plus the cost of maintaining fixed capital in such a way as to stay competitive with other companies in the same industry. 25% is probably conservative in most cases, but in this business it pays to play it safe.

If maintenance capex is a big number, then estimate maintenance depreciation and treat as a use of cash.

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