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

To: Seeker of Truth who wrote (47791)	10/11/2001 5:53:43 PM
From: Stock Farmer	Respond to of 54805

Hi Malcolm, not a bother. And not elementary. Pirah addressed the accounting. I'll address If they started out equal then for a while the first company would have the better economic profit, using your metric. But eventually ???? Since we are estimating the present value of the entire future profit, the chickens all come home to roost. It also turns out that a company that spends $100 in depreciating capital all at once to get a future benefit of $200 over the next ten years is indeed economically less profitable than one that spends $10 a year expensed annually for the next ten years to get the same benefit. Although from an accountant's perspective it all would look the same on the income statement. Accounting and economics are often different things, and both confusing. John.