I don't because it's not a recurring cash outlay - but it doesn't really matter if it works for you. Just focus on developing systems that work for you.
(That said, what really matters with acquisitions is that goodwill permanently remains on the balance sheet. Devious managers can create the illusion of impressive growth when the true goodwill figure is masked. I think, as a rule for investors, always add back impaired goodwill onto the balance sheet.)
Since I'm on the topic of cash flows...
I suppose you can also split capex between maintenance and growth, too, to get a better picture but I don't find it to be that useful because if a company's investing for growth, they will likely continue for the foreseeable future. And when companies aren't investing for growth, barely covering maintenance costs and are closing stores, it's a turn-off even though the "cash flow yield" may look favourable. Many investors get caught into value traps in this way.
I actually spend more time adjusting cash flow from operations to a more true level when I'm really interested in a company. Cash flow can be simplified into profits plus noncash charges (I imagine MBA/accounting students won't like that comment) for a rough guide. But then companies also defer tax, utilise stock-based awards, create bad debt reserves... and most intangible assets that get amortized are not recurring (i.e they were "born" from acquisitions) so you can also adjust there.
Then you can also look at working capital changes - for example, Wolverine Worldwide had negative cash flow last year because they overstocked - but that's not recurring. Cash flows will probably improve as the company bills more receivables and cuts back on inventory (maybe because they offer their overstocked product at discounts). A similar situation happened with many cyclical companies during that cursed period where supply chains were broken. So try and figure out the working capital cycle and try to normalise it. In some cases, I struggle but so long as you have a rough idea...
There are so many different ways to analyse cash flows but not all of them are relevant or necessary.
I adjusted Wolverine's cash flows on my website and explained my method in more detail there -
Research | Contrarian Stocks. Page 5. Funnily, some of my views since then have changed now, though. I'm still young and my brain is sticky, so my methods are constantly being tinkered with.
Right now, for example, I still find recurring and stable cash flows to be important but its overall importance has waned. Similarly to earnings, I find it to be a flawed measure. (EVA is definitely growing on me, but it wouldn't surprise me if, a year from now, I had moved on from that, too!)
For example, fast-growing, small companies will never have positive operating cash flows (let alone free cash flows) - does that make them bad investment propositions? Potentially, slightly riskier in that they'll constantly need funding until they lower their cost base but given the right price it's always on for a savvy investor. To solely focus on cash flows inherently means that you're missing out on so many opportunities. It seems irrational - more so, when you never actually see that cash in your pocket, as an owner!
Personally, right now, I try to find decent companies trading at low PSRs with high gross margins. Positive EBITDA is preferable, but not necessary - think about all of the companies that are impairing goodwill due to "higher rates" (not the fault of management, of course). They don't make operating profits, but they're not bad businesses and I'd hate to miss out on them at discounts. |
