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To: Uncle Frank who wrote (49272)	11/29/2001 5:08:09 PM
From: Thomas Mercer-Hursh	Respond to of 54805

IMO it's the gross margins. Depends on the growth stage of the company. The two are far from independent, of course, since spending money does tend to reduce margins! In the context of FCF, I was looking at it from the perspective that a software company might have moderately high capex requirements when starting up, but continued growth only requires a modest incremental capex, resulting in large FCF and, of course, also margins. For a growth company, a decline in capex might be a signal that future growth prospects are lessened, and an exit from the stock should be considered. I would be surprised to find many software companies that were still growing which had a real decline in capex. A percentage decline, perhaps, but not a dollar decline. A hardware company, however, might have a somewhat lumpy capex, e.g., building a new fab could provide adequate capacity for a couple of year's growth, producing very high capex in the first year, but low in the two year's following until it became necessary to build another fab.

To: Uncle Frank who wrote (49272)	11/29/2001 6:45:43 PM
From: EnricoPalazzo	Respond to of 54805

For a growth company, a decline in capex might be a signal that future growth prospects are lessened, and an exit from the stock should be considered. It is true that capex can be a good "sign" for certain types of companies. Free Cash Flow shouldn't be thought of as a perfect indicator of the health of a company. For instance, sacrificing short-term FCF in order to maximize long-term FCF (e.g. by investing heavily in R & D) is generally a good thing. What Free Cash Flow is good for, and is in fact very good for, is answering the question, "How much money did Company X make this year?" Earnings are basically an accounting fiction. Free Cash Flow is (closer to) fact. This question is not the only important one to ask, as you point out, but it is an important one. Ethan