A reader asks about calculating capital expenditures and Buffett’s owner’s earnings. I believe only maintenance capex is deducted in determining owner’s earnings not growth capex because maintenance is mandatory while growth capex is discretionary.
Analyzing Capital Ex.
A reader asks about Owners’ Earnings.
According to Buffett Owners Earnings = a) Net Reporting + b) Depreciation, Amortization – c) Capex (Maintenance & Growth). Buffett says if a+b is greater than c, then Company is earning sufficient amount for the shareholders.My query is how do we come to a value on Capex? Not precise but on a rough basis?Thank You.–I suggest that you look at an average of the past 5 years of capital expenditures versus asset growth and calculateaverage maintenance capex. Maintenance capex (MCX) is mandatory while growth capex is not. See previouspost on growth vs. maintenance capex here:
But most importantly, look at the business and its competitive landscape. Does the business lack barriers to entry so that much of the firm’s capex goes to staying in place or fending off competition? Compare the company’s capex to its competitors. A recent case study is in the Wall Street Journal today (November 17th, 2011).
Sears Suffers as It Skimps on Stores
While retail experts estimate that store chains traditionally spend $6 to $8 per square foot on annual maintenance, Sears Holdings Corp (NASDAQ:SHLD) is spending a fraction of that amount, said Matthew McGinley, managing director of International Strategy & Investment Group, an investor research firm.