Maintenance Capital Expenditures
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 1
Our first discussion of Maintenance Capital Expenditures (“MCX”) occurred here:
One method of learning is to EXHAUSTIVELY analyze and read about a subject so we can master the topic and understand the principles and subtleties in applying those principles.Please read the case study on IRDM to learn more about analyzing EBITDA-MCX
We are focused on
Return on Invested Capital
which has been defined one way as OperatingEarnings (Earnings before Interest Expense and Taxes,
or better yet, (Earnings beforeInterest Ex
pense, Taxes and Depreciation & Amortization, “
Now we review MCX as part of the (EBITDA
You goal in valuing a company is simply to discount back to the present value all future cashflows of the business. Easier said than done! But to understand a business you must first know
what are owner’s earnings, what cash is available to you after all the necessary expenses/costs
have been made to run the business properly. Professor Greenblatt uses a
method foreasier company comparisons (EBITDA
MCX) while Buffett uses an
method(discussed later).Your specific company and industry knowledge should help you calculate
or normalizedmaintenance capital expenditures. For example, say you are the operator of an amusementpark
one of two
in Phoenix, AZ and you need to plan your future budget. Every year youneed to replace certain equipment, repaint the Merry-Go-Round, etc. But what if your competitoris planning a new exhibit with special effects?
Do you budget increased expenditures tomatch your competitor and remain competitive so as not to lose customers?
Will you beable to maintain your competitive position? As an analyst you may need to significantly raiseyour estimate of
true, future MCX
so as to not underestimate normalized earnings. Imagine ifyou were a luxury hotel owner and your competitor put in new wide-screen high-definition TV
screens in all the hotel’s rooms, would you match that expense
/investment or lose customers?
Prof. Greenblatt Discusses MXC
Prof. Greenblatt would implore his students on EBITDA
show this in your reports. Youhave to subtract out the maintenance capital expenditures (MCX). Now, if the company isgrowing and you want to f
igure out “normalized earnings.” Capital spending is the number to
use. Capex is a cash expense but depreciation is a book entry not cash expense.Let us say you are opening 10 new stores in addition the 10 stores you already have, the capexwould include keeping up (maintaining their competitive position) the ten stores you alreadyhave making capex on those stores and the cost of opening the ten (10) new stores. But you
won’t get the benefit of those new stores in that year.
What you really want for normalized