How to identify if a company is up to date with its required investments
Hey there,
in the course of a due diligence, it is important to understand capex. This is the last step in the cash flow calculation to derive the free cash flow. The free cash flow is used in many valuation models to calculate the value of a firm.
Capex stands for capital expenditure. It relates to investments into fixed assets, i.e. tangible and intangible assets.
Two aspects matter in a due diligence. First, what’s the recurring level? And second, which portion relates to maintenance and which to new investments (“growth capex”)?
This weekly insight is about the general calculation and the maintenance portion of capex.
Introduction and calculation
Capex can be calculated directly via the fixed assets schedule. This register shows new investments as well as disposals. If this is not available, you can calculate the implied capex. How? By calculating the change in fixed assets and adding back depreciation and amortization. If fixed assets increase from 100 to 150 and depreciation is 50, then capex would have been 150–100+50 = 200.
Maintenance capex
In a due diligence, you need to look at growth and maintenance capex. Maintenance is the recurring part. Production facilities, for example, will need a certain level of maintenance every year. A future investor wants to know how much to invest to keep the facility running.
Also, you need to understand if there is any deferred capex. This means that required investments haven’t been performed. Specifically, that machines could be outdated. This, in turn, implies that many investments are required to update everything again.
Quick shout-out
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As always, feel free to reach out if you have any questions.
Cheers,
Jan
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