Dear all,
I am reading Schweser 2015 Book 3 - Equity (page 144 of Reading #34 - Free Cash Flow Valuation) and have a question from one paragraph, I quote:
“… Fixed capital investment is a net amount: it is equal to the difference between capital expenditures (investments in long-term fixed assets) and the proceds from the sale of long-term assets”
I understand that fixed assets refer to PP&E generally, how about for firm with investment in financial assets. Does the “sale of long-term assets” include proceeds from the sales of financial assets? Or FCInv refer strictly to transaction involving fixed assets?
Thank you.
Cheers,
Ernest
Good question.
I think it depends on the analysis you are performing. Held for trading securities G/L goes in the operating cash flow though, so I don’t think it would be relevant in calculating FCInv. Held to maturity securities are not relevant neither. However available for sale securities proceeds from realizable gain are in the investing cash flow, and could be included as CAPEX… But if I were analyst, I would decide whether to include it or not based on the analysis i’m performing and the type of company I am analyzing.
Can anyone help us out?
Completely depends on the nature of the business. But in deriving free cash flow to firm, the classification of financial assets would be either in CFO or CFI, in which case, the result of FCF is the same.
But generally,CAPEX referes to investment in capital formation to keep the business growing and running. But CAPEX is only a part of CFI, where other cash flows might be recieved or charged outside of it.