Maintenance Cap Ex. Two definitions.

[Laxputs]

Buffett defined his route to owner earnings as calculating the cost of keeping the business at these revenues/earnings, the current earnings power of the business--so maintaining revenues and earnings power, not maintaining the operational capacity of the current fleet; maintaining the operational capacity of the business.

 

I always understood that to be m-capex. I believe that is what people describe m-capex to be. I derive OE from subtracting that level of cash spend from OCF. But if a company needs to purchase equipment over and above what they state m-capex to be to maintain their earnings power, the definition of m-capex is inaccurate.

 

So is m-capex maintaining the current equipment? Or maintaining the current earnings power? These are very different.

 

TIA

[jschembs]

I view maintenance capex as that which is necessary to maintain current unit volume of earnings power, recognizing a business could still grow revenue/cash flow with price increases that don't require incremental capex.

[LC]

watch out using OCF, you have to figure out if working capital changes are permanent or temporary.

[jschembs]

watch out using OCF, you have to figure out if working capital changes are permanent or temporary.

 

Good point - also worth investigating other major components of OCF. These days, stock comp addbacks can be a huge item which certainly warrants adjustment (either excluding from OCF or making assumptions about future equity dilution).

[topofeaturellc]

Its maintaining the current earnings power in real terms.  Hence maintenance capex>D&A of productive assets on an ongoing basis unless the capital required has seen price deflation.

 

Also agree re: CFO - need to normalize NWC changes.  Also recognize that cycilical POC bizzes that run negative NWC balances may need to be adjusted for.