Capital Expenditure

Free Cash Flow (FCF) is the cash flow generated by the core operations of the company after deducting the investments in new capital. Mathematically,

FCF = NOPLAT – Net Investment

Where,

NOPLAT = Net Operating Profit Less Adjusted Tax, represents the profits generated by the core operations, minus the taxes. It excludes non-operating income and interest expense.

Net Investment = Increase in the invested capital from Year 1 to Year 2. Net Investment in non-operating assets, and gains/losses/income related to these non-operating assets are not considered.

Calculating FCF

FCF = NOPLAT + Non-cash Operating Expenses – Investments in Invested Capital

Where,

Non-cash Operating Expenses are those expenses that are deducted from the revenue to generate NOPLAT. Depreciation and non-cash employee compensation are two most common ones. We do not add back the amortization and impairment of intangibles to NOPLAT.

Investments in Invested Capital: To grow the business, companies consistently invest a portion of the gross cash flow back into the business. Four categories form gross investment:

Operating Working Capital: Investments primarily in operating cash and inventory. Non-operating assets (excess cash) and financing (dividends payable, short-term debt) are excluded from Operation working capital.
Net Capital Expenditures equals investment in Property, Plant and Equipment (PP&E), minus the book value of any sold PP&E. It is determined by adding the increase in net PP&E to depreciation. Do not estimate the capital expenditures by the change in the gross PP&E since it can understate the actual amount.
Include investment in capitalized in the gross investment.,
Goodwill and acquired intangibles: For acquired ones, where cumulative amortization has been added back, we can calculate the investment by the change in the net goodwill and intangibles. For intangibles that are been amortized, add the increase in net intangible to amortization.

Research reports are a good place. Else, we need to attend the investor meetings, presentations and conferences hosted by the company. We can try in MD&A section to get a hint (for example, a statement that says “$150M wind farm being built by 2020”), but generally, management does not disclose such information in a usable format (like public 10-K/Q reports) unless it’s a major project for them. There are some Oil and Gas and many utility companies that discloses such information. Oil and Gas highlights it as it impacts their production growth directly; it’s a big driver for them. Analysts need to see if Oil and Gas companies are generating enough FFO over CapEx needed to sustain or grow their production.

If I were to guess, I’d look at asset replacement based on the life of the existing assets and replacements values. And then, the cost of the expanded capacity they may highlight elsewhere. If they are forecasting a 15% growth on higher units, there will be a likely event of CapEx, assuming no under-utilization of capacities.

Common-size statement analysis to identify trends: We can also try to derive the capital expenditure by looking at the company’s historical financial statements (balance sheet, income statement and cash flow statement). Usually, companies in an industry spend in a proportion to their sales or EBITDA. If the sales are growing, using the same ratios (as in the past) can help derive the figure. Similarly, if the revenue / EBITDA estimates are flat, reducing the CapEx in proportion to the sales will help arriving at the estimate.

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