To: William Cloutier who wrote (62665 ) 10/10/2019 2:51:51 PM From: Nya_Quy Read Replies (2) | Respond to Ello William Cloutier,Be careful when you subtract maintenance Capex. Even more if you use future growth as an input to your valuation process. Value Investing by Bruce Greenwald). As I am no Warren, I refrain from situations where the bulk of the price I pay for a company is for the supposed growth of it, which is detrimental when your company has no strong moat. Bottom line, if you do not assume growth (difficult to determine anyways!) you do not have to subtract it in the end.In order to have future operating inflows, we need to invest capital in operations. When growth Capex is not subtracted in our valuation, it just vanish and is never taken into account in the valuation engine because future depreciation charges are added back to OCF or Ebitda. Per my definition: growth capex = total capex minus maintenance capex (i.e. capex necessary to replace assets and maintain the current size of operations: a zero growth situation). So only maintenance capex should be subtracted from OCF. The remainder of this is the operational (unlevered) FCF, and as the word "free" suggests, the company can decide how it will be used, for growth, dividends, buybacks, to make a giant bonfire, whatever suits them best... However, the assets of the company itself should be maintain/replaced, otherwise it is slowly liquidation itself. Are you, perhaps, using a different definition of growth capex and is this the cause of your confusion?
