Warning : All statement below is my own opinion unless written otherwise.
Now, CapEx is money or cash spent for buying new fixed-asset (tangible [property, plant and equiment / PP&E] or intangible [license, patent, rights]) or spent to increase value of fixed-assets (could be repair the asset or add some add-on to the asset). So, my guess is, CapEx never have negative value. CapEx is only exist when company spend money, not receive money.
CapEx may or may not reported explicitly in Financial Statement.
In many books or sources, CapEx is calculated by using Net Fixed-asset (value after depreciation) and Depreciation cost for whole period. Here the formula:
CapEx = [Net Fixed-Asset]of just-ended year minus [Net Fixed-Asset]of previous year plus Depreciation cost for the period.
Fixed-Asset can be tangible or intangible. For tangible, it is commonly written as 'Net PP&E'.
The source of value can be taken from Balance Sheet and Cash Flow Statement. Net Fixed-Asset is taken from Balance Sheet and Depreciation cost for the period is taken from Cash Flow Statement.
CapEx in Simple Case :
Example of Simple Case :
Balance Sheet
|
||
2009
|
2010
|
|
Fixed-Asset
|
4000
|
5000
|
Depreciation Accumulated
|
700
|
850
|
Net Fixed-Asset
|
3300
|
4150
|
So, CapEx = 4150 - 3300 + 150 = 1000. The depreciation can be taken from Cash Flow Statement also.
As you can see, the CapEx also can be obtained from change in Gross Fixed-Asset, right? That is the problem with simple example. I will not remake more complicated example. Here try to read article from here. That article is not written by me. I just take the example given.
CapEx in more Complicated Case :
In of McKinsey & Co "Valuation 5th edition" page 156, it is written that. "Do not estimate capital expenditures by taking the change in gross PP&E. Since gross PP&E drops when companies retire assets (which has no cash implication), the change in gross PP&E will often understate the actual amount of capital expenditures.". At first I don't unerstand what it means.
Look at example from the link above. At the year 5, there is CapEx of 50 million (in blue text). Let try to calculate CapEx using just above formula. Net PP&E at year 5 (beginning/previous period) is 50, Net PP&E at year 6 (ending/current period) is 40. Depreciation cost incur between year 5 and year 6 is 60. The CapEx = 40 - 50 + 60 = 50. So the result is same as blue text.
Now Let's using Gross PP&E instead of Net PP&E. Gross PP&E at year 5 (beginning/previous period) is 250 (purchase at year 1), Gross PP&E at year 6 (ending/current period) is 300 (purchase at year 1 plus at year 6). Depreciation cost incur between year 5 and year 6 is 60. The CapEx = 250 - 3000 + 60 = 10. So the result is understating which from suppose to be 50 become 10 million.
Actually using Gross is okay as long as you able to include the depreciation for each item. But it is impossible because in Financial Statement published by Company will not disclose each depreciation accumulated for each item of assets.
CapEx if Company sold some Fixed-Asset
Let's take same example, at year 5, beside the Company buy fixed-asset, the Company also sold some of fixed-asset purchased at year 1 as much as 100 million. Then the CapEx also can be traced. Let's assume that the asset sold have same rate of depreciation as the other asset purchased at year 1. At year 5, after assets sold, the Net PP&E is 30 million. When you sold fixed-asset, you remove the cost of that asset sold (100 million) and add back the depreciation that incurred for that asset until the fixed-asset sold (80 million), from 50 million net value before asset sold.
Next, is back to formula, now the Net PP&E at year 5 you use will be 30. Net PP&E at year 6 is 40, Depreciation cost incur between year 5 and year 6 is 40 (30 million of depreciation from Net PP&E after the asset sold, plus 10 million of depreciation from newly purchased asset). CapEx = 40 - 30 + 40 = 50.
See, when you sold the asset you still get CapEx is 50, because that the amount you spend to buy asset. But it is different when you say Net CapEx So, you also can say that Net CapEx "is equal to investment in property, plant and equipment (PP&E), less the book value of any PP&E sold" (McKinsey & Co - Valuation 5th Edition, page 156).
But, remember, when you know if the Company sell some of it fixed-asset, you need to adjust Net PP&E at beginning/previous year become value after the fixed-asset sold. If not, as example above, the Company sold 100 million fixed-asset and you still using Net PP&E before the asset sold, which is 50 milllion, then what you get will not fully reflect money spent. In other word, what you get is net change (if you buy 200 million, you sell 120 million, the net change is 80 million).
Another example from real one, BlackBerry 2011 and 2012 Financial Report. In 2011, Net PP&E = 2504 million. Net PP&E 2012 = 2748 million. Depreciation for between 2011 and 2012 = 660 million. CapEx = 2748 - 2504 + 660 = 904 million. In Cash Flow Statement stated Acquisition of PP&E = 902 million. This small difference may caused by round up between Net PP&E and depreciation reported.
Hey, seems like you are cheating, you new the depreciation at first.
Well it may look like that, now let involve Cash Flow Statement. In Cash Flow Statement in Operating Activities section, you can found Depreciation item there. The number recorded in Depreciation number is depreciation cost incurred for that whole period (if in Annual Report then it is whole year). So let's say, you don't know depreciation incurred between year 5 and year 6. Instead you see in your Cash Flow Statement, reported depreciation cost is 35 million. And the Net PP&E at year 6 is not 40, but instead it is 45. Then still you will get CapEx 50 million. (45 - 30 + 35 = 50).
If you really use Financial Report from a Company, it is still like that. you never know depreciation cost for each asset, instead you only know Net PP&E at beginning, at end, and Depreciation cost incurred in that period.
There is alternative to formula above.
Remember, as long as the Company buy foxed-asset using cash, then there is alternative approach. Which is using Cash Flow Statement. If Company buy using cash, that cash activities must be recorded in CF Statement under Investing Activities in item Acquisition of PP&E (for tangible fixed-asset) or Acquisition of Intangible Asset (for intangible fixed-asset). And when company buy fixed-asset, in Balance Sheet also change accordingly. So, you can get Net change in PP&E (Net PP&E of just ended year minus Net PP&E of current year) by using number in Cash Flow Statement directly.
Also, the advantage using CF Statement is, whenever company sold the fixed-asset, the money get from asset sold usually recorded separately in different item. for example for BlackBerry Ltd. there are two item first "Acquisition of property, plant and equipment" and second " Proceeds on sale of property, plant and equipment". So even, company sell asset, which is hardly to grasp if just using Balance Sheet, it is easily tracked using Cash Flow Statement.
And then, the number in Cash Flow Statement reflect fully money spend on buying fixed-asset. Separated from money spend to repair or to add add-on. But the only disadvantage is, I don't know if it is possible for large company bu fixed-asset not using cash. If in reality, fixed-asset can be acquire using non-cash instrument (maybe such as bond, or payable), then using CF Statement will understate the CapEx. Plus if you don't know how much company sell his fixed-asset, then it will become harder to estimate CapEx.
More Problem is if Fixed-Asset decreasing
Yes, the general formula above will pose problem if the fixed-asset (PP&E) is decrease year-to-year. Example, different from example above. Here I take example direct from BlackBerry Ltd Financial Statement. In 2012, Net PP&E = 2733 million. In 2013, Net PP&E = 2395 million. The Depreciation (BlackBerry use Amortization) for whole period 2012 to 2013, stated in Consolidated Balance Sheets Detail = 721 million. The if you use formula above, CapEx = 2395 - 2733 + 721 = 383.
Whereas, in Cash Flow Statement stated Acquisition of PP&E = 413 million. It didn't match!. The problem might caused by Asset Held for Sale. When asset held for sale, Company separate the asset from fixed-asset to current asset. And then we don't know if the Asset Held for Sale still get depreciation or not (usually current asset have no depreciation, but this current asset is formerly fixed-asset). And then hard to know if company have sold some of the asset, (example, previous asset held for sale is 14 million, sold 10 million, but company add more asset to sell by 11 million, now asset held for sale is 15 million).
Another example from Blackberry, this time is quarterly report. In Q1FY2014 Net PP&E = 2200 million. Q2FY2014 Net PP&E = 2119. Depreciation for three month is = 164. So, CapEx = 2119 - 2200 + 164 = 83. Whereas, In CF Statement Acquisition of PP&E consumed 195 million. In other hand in Balance Sheet, there is increase of Asset Held for Sale from 105 to 122 million. And also the surprising is, in CF Statement there is not item indicate that company receive cash from asset sold.
Until this article wrote, I haven't found out why that happen.
At the end of this article. I hope this little explanation can help, but don't rely on this article solely, try to use your logic, read more book, test if my argument is right or wrong.
Thank you very much.
No comments:
Post a Comment