Problems With Capital Expenditures
The expenditures for maintenances of assets is only part of the capex reported on the Statement of Cash Flows. It must be separated from the expenditures for growth purposes. This split is not a requirement under GAAP, and is not audited. Management is free to disclose maintenance capex or not. Therefore this input to the calculation of free cash flow may be subject to manipulation, or require estimation. Since it may be a large number, maintenance capex's uncertainty is the basis for some people's dismissal of 'free cash flow'.
A second problem with the maintenance capex measurement is its intrinsic 'lumpiness'. By their nature, expenditures for capital assets that will last decades may be infrequent, but costly when they occur. 'Free cash flow', in turn, will be very different from year to year. No particular year will be a 'norm' that can be expected to be repeated. For companies that have stable capital expenditures, free cash flow will (over the long term) be roughly equal to earnings
Read more about this topic: Free Cash Flow
Famous quotes containing the words problems with, problems and/or capital:
“I am always glad to think that my education was, for the most part, informal, and had not the slightest reference to a future business career. It left me free and untrammeled to approach my business problems without the limiting influence of specific training.”
—Alice Foote MacDougall (1867–1945)
“In many ways, life becomes simpler [for young adults]. . . . We are expected to solve only a finite number of problems within a limited range of possible solutions. . . . It’s a mental vacation compared with figuring out who we are, what we believe, what we’re going to do with our talents, how we’re going to solve the social problems of the globe . . .and what the perfect way to raise our children will be.”
—Roger Gould (20th century)
“It is a capital blunder; as you discover, when another man recites his charities.”
—Ralph Waldo Emerson (1803–1882)