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QuestionsCategory: Financials QuadrantShould CAPEX include “Acquisition of subsidiary, net of cash acquired”?
Tony asked 2 years ago

Hi guys,
I am evaluating an Australian company called Lovisa, which operates in the fashion industry. I have a question regarding its capital expenditure in its 2015 annual report, which is available here.
 
On page 37 (cashflow statement), there is an entry for “Acquisition of subsidiary, net of cash acquired”. Scrolling to Note A7, it would seem that the company acquired a South African company in order to operate there through rebranding of the existing stores. Net of cash acquired, the company paid 2,323 mil. for this acquisition. 
 
Coming back to the cashflow statement, my understanding is that the acquisition of this company (2,323) is similar in nature to the acquisition of fixed assets (4,686), and should thus be included in the calculation of the total capex. Thus, the total capex for 2015 is 4,686+2,323=7,009.
 
Can someone confirm my understanding please? Thanks!
 
 Cheers
Tony

1 Answers
Victor Chng answered 2 years ago

Hi Tony,
 
The acquisition is a development capex so you should exclude from capex calculation. 

Tony replied 2 years ago

Thanks Victor but did you mean to say “should include” rather than “should exclude”?

Victor Chng replied 2 years ago

should exclude

Victor Chng replied 2 years ago

when we calculating FCF using capex, we are usually looking for maintenance capex (capex that does not bring in revenue). In most company’s capex in financial statement, they will lump up the development capex (Capex that bring in future revenue) and maintenance capex together which make it hard to differentiate. Hence, at times when your FCF is negative, you have to read the annual report to find out whether the management are spending on development capex. If they are spending on development capex then negative FCF is justify and it may help to bring more FCF in the future.

To bring in more clarity on develpment capex, let us use F&B business as a example. Every few years, F&B stores have to refurbish their store and the amount spend is your maintenance capex because refurbishing existing store does not bring it new revenue. where as when the F&B business started to expand and open new stores, the amount spend is development capex because the new stores will bring in additional revenue.

Hence, maintenance capex is amount spend to maintain the business operation.

Tony replied 2 years ago

Okay. Thank you!

Victor Chng replied 2 years ago

Welcome :)