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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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