[...] (5) Calculating Maintenance Capex [...]

Thanks for taking the time to comment.

I’m not sure I agree with your view that capex affects output. Growth capex, yes, which eventually leads to increased sales. But maintenance capex does not affect the output at all.

I questioned Greenwald’s method of calculating maintenance capex a very long time, but I do see the logic and from everything I’ve considered, it is the best method so far, but still flawed in some areas.

Since capex directly affects output rather than sales (a company may not be able to shift the additional outpu) would it not be better to use sales and increases in inventory (as a proxy for total increase in production)?

Also if information on the unit amount of production is available (as travis suggested for COP) this should provide a more appropriate figure.

Great blog by the way.

[...] since I haven’t found a single person who can accurately judge or calculate maintenance capex, I just use the total capex in the stock value calculators which will more than cover the working [...]

[...] Capex is very low compared to its revenue which is why every 20c from $1 of sales is converted to FCF. [...]

Now I got to find Mr Greenwald’s email and ask him these questions.

You would also think that there would be someone, even among the pros and famous managers that would talk about this.. From what I’m experiencing, even the best value investor managers may not even calculate maintenance and growth capex.

Great idea to email Bruce. Let me know if you do and hear back.

Regarding this CapEx issue it’s definitely a tough one to get my head around. The way I see it just do what makes most logical sense for the situation (until you hear from Bruce of course!). If you get a negative number then that obviously doesn’t make sense as companies can never go with zero nevermind earning money on their maintenance capex. If the number is positive and within reasonable range of depreciation then I’d go with the zero growth capex number as it does make sense intuitively to use change in sales to ppe/sales as a proxy for the extra capex required to support the additional sales.

Now one other issue I realized that we haven’t discussed yet is the issue of a negative GROWTH capex number. This would happen when the company’s revenue decreases. This does not make intutive sense as by subtracting this negative number from current capex we are imlying that if the company maintained its level of sales it would have a greater level of capex than it does in a year of decreasing sales. I would think that a year of decreasing sales and a year of flat sales should have the same capex and it would make sense that this is by definition mainentance capex. So in either of these situations I would just use that years capex as the zero growth capex number.

Would love to hear your thoughts.
Jonathan Goldberg´s last blog ..Position Update – TSE:BUI

It’s also a shame that there is only a handful of websites or blogs that discuss EPV. So far I only know of you, my Value Idea and me..