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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Seeker of Truth who wrote (47791)	10/11/2001 1:40:50 PM
From: Pirah Naman	Read Replies (2) of 54805

Malcolm: Your question strikes at the essence of FCF. Companies do depreciate their capital investments, and that depreciation is a [non-cash] charge against earnings. Why is it a non-cash charge? Because the company already spent the money in a previous year, no cash is flowing out this year, so to get cash flow in we add the depreciation to the earnings. However, they must regularly spend on property, plant, and equipment, and this is NOT deducted from accrual earnings which are reported. Hence we take capital expenditures from the cash flow in to determine a true(er) profit. Either way, the company must spend the money at some point. The question is only in the accounting treatment. If we had a very simply structured company that was depreciating its PP&E at the same rate it was buying it, then FCF would equal earnings. But some companies are more capital intensive than others - semiconductor companies typically have FCF less than earnings, software companies often have FCF greater than earnings. - Pirah

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