Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 3
Hi Paul,

Why do you exclude "growth capex" from your FCF calculation? It and any increase in working capital is the fuel for growth and once spent can not be distributed to shareholders. Imo not counting growth capex in FCF falls in the same category as not counting stock options as an expense - it's pure fiction.

Let's say we have two companies in the same industry with a $100m in revenues and produce $10m in FCF. Both require $10m in "maintenance" capex to maintain sales and profitability. Company A is happy to stay at this level but company B wants to grow aggressively and starts ramping up capex to $20m per year. Using your maintenance capex only both companies would only count $10m in FCF. Naturally analysts now project growth for company B, let's say 20% for the next five years vs. little more than inflation, say 5% for company A.

In this example company B gets its growth for free - no inputs needed because growth capex is not included. I see from your profile that you list "business owning" & I'm sure that your own experience of investing "growth cash" would point to its inclusion in capex for the calculation of free cash flow to you the owner

It's easy enough to model zero or negative cash flows for the first few years for high growth companies using a DCF spreadsheet so I'm not sure why its important to exclude growth capex.

I think it's important to understand what maintenance capex is and I've sometimes played around with the DCF for a higher growth company by using maintenance capex only and assuming very modest growth rates - a sort of "what would cash flows look like if the company stopped its rapid expansion" idea.

imo you simply can't have the higher assumed growth rates and at the same time exclude the capital necessary to achieve them

Best Regards
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.