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I'm a little confused about the calculation of investment in fixed capital.

Investment in fixed capital = CAPEX - Depreciation

What is the reasoning for subtracting depreciation from capex? I thought the whole point of the cash flow statement was to show (in a non-accrual way) where cash was spent, so I thought CAPEX shouldn't include any depreciation in it.

Thanks for any help in clarifying this for me.
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Not clear about your question. Please re-state using the financials from a company of your choice to illustrate.


Hewitt
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Hi Hewitt, thanks for replying.

I think I'm missing something fundamental or really simple. As I understand it, investment in fixed capital is the amount that a company has spent on property/equipment/etc. When we want to find the investment in fixed capital, why isn't it just the Purchases of PP&Eq line in the cash flow statement?

Are you subtracting the Dep/Amort amount from PP&Eq just to account for the fact that it has already been subtracted from revenue to determine net income? If that's the case, I would argue you shouldn't say

Investment in Fixed Cap = (Purchases in PP&Eq - Depreciation/Amort)

but rather,

Investment in Fixed Cap = Purchases in PP&Eq
Corrected Net Income = Net Income + Depreciation/Amort

Then again, maybe I'm completely misunderstanding.

An example we can use is CMG (http://library.corporate-ir.net/library/19/194/194775/items/244819/Chipotle_AR06.pdf , pg 45)

Net Income = $ 41,423
Depreciation and amortization = 34,253
Purchases of leasehold improvements, property and equipment, net = (97,312)

Thanks,
Ed

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Ed -

1. Based on your figures above, CMG's investment in fixed capital is $34,252 - $97,312, or $(63,059).

2. I covered this topic on pages 56-58 of my book. You do not have to buy my book to ask a question on this site. But if you ask a question that is covered in the book, I respectfully ask that you read the book first.

3. A 2005 study by Alliance Bernstein found that the 20% of large U.S.-based companies that had the smallest balance sheet growth outperformed the stocks of the 20% of the companies with the highest balance sheet growth by more than 9 percentage points a year, over a 26-year period.

What's the tie-in to investment in fixed capital? Simple. If a company is growing rapidly, its capex is probably going to be greater than its depreciation charge. Indeed, the faster the company is growing, the bigger the gap between capex and depreciation. As analysts, we want to if management is making a large investment in fixed capital because a) it is a use of cash (so less cash for more certain value-creating activities like dividends and stock repurchases) and b) the assets that management is investing in may never benefit the stockholders. This is because the company's competitors will follow suit, investment-wise. So the benefits bypass stockholders and instead flow thru to consumers in the form of lower prices. Rapid growth in fixed assets is one of the classic red flags for short-sellers, and Jim Rogers mentions in John Train's The New Money Masters that this was one of the ratios that told him to sell a stock.

Hope this helps.


Hewitt
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Thanks, I think I figured it out. IiFC is just the amount over what was expensed as decpreciation. The True amount spent on fixed capital however, is the PP&Eq line in the cash flow statement as I originally thought.
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