where to from here, page-54

persistentone:

Yes, you are absolutely right: I am a Return on Invested Capital Man.

But more than that: I am a acutely interested in Cash Flow Return on Invested Capital (you might have seens its acronym in investment texts: "CROCI").

As for your observation that WES is "running out of growth capex opportunities". That's a bit of a glass half-full standpoint, I think.

Over the past five years they've invested almost $6bn in growth capex out of total Operating Cash Flows of $14bn.

The glass half-full position is that, DESPITE this aggressive growth spend, the cash generating qualities are such that the balance sheet can't help it, BUT to find itself being repaired to the point of being, (dare I say it?) "lazy".

As for you concerns about: "it not always being obvious what is the breakdown between maintenance capex and growth capex. A large company like WES may release that, but most small companies will not, even if you read footnotes in the filings. And unfortunately the regulators and GAAP help them hide this information since they only need to report a single capex line in the cash flow statement filings.

We want to measure free cash flow as operating cash flow minus the maintenance capex. In reality, what we can easily measure is operating cash flow minus all capex. And most web sites will define "free cash flow" as OCF minus all capex."

Yes, knowing what Maintenance Capex is essential information. Without that insight, you are shooting in the dark.

But there are some easy ways to get around the fact that companies fail to explicity publish Maintenance Capex on a standalone basis.

The easiest way - and it lends itself perfectly to spreadsheet work - is to set maintenance capex equal to depreciation. In my experience this results in a close approximation of reality.

Alternatively, you can derive maintenance capex from industry norms once you get enough of a "feel" from first hand anecdotes. For example, most businesses in the same economic sector will have similar Maintenance Capex as a percentage of Sales.


Hope that helps.

Cam