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Calculating Capex from Cash Flow Statement | Impairment of Intangible Assets | Use of PBT/NFA for Asset Productivity

Modified on May 25, 2019

www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. We have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to the following queries:

  • Can we calculate capital expenditure from the cash flow statement?
  • Understanding the impairment of intangible fixed assets for EPC contractors
  • Use of PBT/NFA for estimating asset productivity

 

Can we calculate capital expenditure from the cash flow statement?

Dear Dr Malik,

It has been a pleasure reading your blogs. I have prepared my own spreadsheets for self-sustainable growth rate (SSGR) now after having read your articles.

I have a query regarding capital expenditure (capex) calculation from the cash flow statements.

Would it be fair to say that the net difference between fixed assets purchased and the proceeds from the sale of fixed assets would provide the capex for that particular year?

It would help me solve the final piece in determining the margin of safety.

Best regards,

 

Author’s response:

Hi,

Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort to understand different concepts.

Capital expenditure (capex) for any year can be calculated as the difference between gross fixed assets (GFA) & CWIP at start of the year and end of the year. It can also be calculated by deducting net fixed assets & CWIP at start of the year from the net fixed assets & CWIP at end of the year and adding back the depreciation for the year.

Capital expenditure (capex):

(GFA + CWIP) at the end of the year – (GFA + CWIP) at the start of the year

OR

(NFA + CWIP) at the end of the year – (NFA + CWIP) at the start of the year + Depreciation for the year

The cash outflow under fixed assets may be thought to be a proxy of the capital expenditure for any company. However, there may be cases where there might be certain differences like:

  1. E.g. if the cost of machinery in the plant is ₹100 cr. and the company paid an advance of ₹80 cr. for purchase of machinery in the previous year and showed it as a capital advance under current assets. Therefore, in the previous year, it may show it in cash flow from operations (CFO) calculation (as it is shown as current assets). In the current year, it pays only ₹20 and gets the machinery delivered. In the current year, the company may show only ₹20 as cash outflow under cash flow from investing (CFI) as the purchase of fixed assets because in the current year only ₹20 cr. has been paid for fixed assets.
  2. Many times, companies may treat the cash outflow for projects under implementation differently, which are currently being shown under CWIP.

Further advised reading: Understanding Cash Flow from Operations (CFO)

As you would understand that there are many ways in which companies display their financial numbers, therefore, it is always advised to corroborate the cash flow data with the balance sheet so that we may not do any error unknowingly despite doing the hard work.

All the best for your investing journey!

Regards

Dr Vijay Malik

 

Understanding the impairment of intangible fixed assets for EPC contractors

Advised to read this article first: Analysis: KNR Constructions Ltd

Hello Dr Malik,

I wish to seek some clarity on “other intangible assets” with respect to this statement that you mentioned for KNR Constructions Ltd:

“An investor would notice that the projects on whose sale price, the company has to take a loss were operational annuity projects. Therefore, the reported financial numbers in the profit & loss statement of an infrastructure/EPC player may not communicate its true financial position/money making ability for its shareholders.”

However, in the FY2017 annual report (page 134), it is mentioned that the impairment “is shown under exceptional items in the statement of profit and loss.”

(1) Given this note, the profit & loss statement (P&L) does show the impairment loss. Right? Then what exactly do you mean when you say the P&L may not communicate its true financial position for its shareholders?

(2) I do not exactly understand the term “other intangible assets” in consolidated financials, especially the term “carriageway” used for intangible assets in Notes to Financial Statements (Note 3.3, page 165). Does it mean all contracts under HAM & BOT model? Therefore, P&L transactions (revenue and expenses) only include EPC-related transactions.

Regards,

 

Author’s Response:

Hi,

Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort to understand different concepts.

1) The impairment in the P&L will only be present for the year in which the company decides to recognize the loss/diminution of value. However, an investor would acknowledge that the diminution of value might not have happened in a single year. Many times, companies keep poorly performing projects/assets in their balance sheet at unimpaired/original value for many years before the impairment becomes so significant that it can no longer be avoided. In case, such period of delay in recognition may extent even in decades.

Therefore, an investor should keep in mind that any point of time, there might be projects in the balance sheet shown at unimpaired value, which actually may have witnessed significant impairment in true value.

Further advised reading: Understanding the Annual Report of a Company

2) Most of the companies explain their usage of accounting norms in the “Significant Accounting Policies” section of the annual report. Referring to this section also may help an investor understand the conventions being followed by any company. In case, an investor needs further clarity regarding these accounting terms and conventions, then we would request her to take an opinion from a chartered accountant as only he/she may be in the best position to explain them.

All the best for your investing journey!

Regards

Dr Vijay Malik

 

Use of PBT/NFA for estimating asset productivity

Dear Dr Malik,

In your analysis on Castex Technologies Ltd (erstwhile Amtek India Ltd), you have compared profit before tax (PBT)/net fixed assets (NFA) with fixed deposit (FD) rates. Is there any specific reason that you would prefer to compare PBT/NFA% with FD rates, instead of CFO/NFA% with FD rates?

CFO/NFA% for Castex Technologies Ltd comes to 12%, which is higher than the FD rate, & hence the question.

I understand, as you have mentioned elsewhere in many articles, that finance is versatile and it depends on individual investor preference. However, your reason would be helpful in the assessment.

Regards,

 

Author’s response:

Hi,

Thanks for writing to us!

Cash flow from operations (CFO) may contain the impact of business of previous years as well when receivables of last year are collected in this year. Similarly, CFO may not show the effect of full business done in the current year as many times receivables may be delayed to the next financial year.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Therefore, to assess asset utilization, we prefer PBT/NFA.

All the best for your investing journey!

Regards

Dr Vijay Malik

P.S.

DISCLAIMER

Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of any of the companies discussed above

 

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