This might help. Please note that there is a link to a spreadsheet model in his blog post. I note that he definitely takes the "reinvested amount" from the estimated cash flows in his model.
Perhaps something for you to ponder.
Two companies, company A and company B. Both have the same book value of $1,000m. Both have the same free cash flow in the current financial year of $100m.
However, say we have a crystal ball and can see into their futures.
Company A can invest $50m a year for 10 years which will increase cash flow by 10%pa.
Company B can invest $100m a year for 10 years which will increase cash flow by 10%pa.
After the initial 10 year period the firms will have no further growth opportunities. Assume that earnings are maintainable forever after this point if it makes it easier.
Which company would you rather invest in? Why? And if you can tell me why, you can show me mathematically the case.
Using the potential return in your valuation, but not including and adjusting for the capital costs made to generate that return, does not make logical sense to me.
It looks like a no brainer on paper. But it doesn't if you use the wrong logic and mathematical approach.
The key point is that growth always has a cost. And the whole purpose of the distinction between growth / maintenance capex in CSinvesting link in your previous post is to figure out stable business cash flow so you can figure out how much they have had to spend to grow earnings.
VOC Price at posting:
$5.45 Sentiment: None Disclosure: Unspecified
