John,
Great post. I appreciate the effort that goes into a presentation like that.
I followed along fine until:
>>"Take capital then, add more between now and then, have some depreciate... this has to add up to what we have today. In other words, the total should be 1,535 M$.
But it isn't. Lo and behold, depreciable assets are 8,464 M$ (Property plant and equipment alone is 4,102 M$)!! Obviously, the company somehow spent 6,929 M$ that didn't show up on the cash flow statement. No mystery, it was purchased with non-cash. With shares. Remember all those acquisitions?"<<
OK, I see how FCF was insufficient to cover the net increase in D&A assets, but to believe the difference was purchased with stock .. is an enormous leap for me. You are presenting a "value-flow model" where only FCF and stock funded the increase of D&A assets. I don't understand how that model can be accurate.
In particular, two things bother me. First, as a business grows, it requires more working capital .. just like it needs more Property and Equipment. Over Cisco's last 7 fiscal years, the years you showcased, working capital increased $8.3 billion, from $0.66B (1.0-0.34) to $9.0B (17.4-8.4). To be consistent, shouldn't the model be allowing, even requiring, FCF funds to provide the working capital?
Secondly, and while not the case for Cisco, Property and Equipment are often purchased with long-term debt. Why didn't this potential provider of cash deserve get an honorable mention, at least?
TIA, Ron :-) |
