D. H. Taylor Analysis
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I am wondering if a company invests in CAPEX does it really affect EPS growth? I mean, my understanding is CAPEX affects investing cashflow but not earning per say. for sure, amortization taken on those assets purchased can affect the bottom line and thus earning and thus EPS, but it’s not a direct link, but mostly a % based on number of years to amortize and other amortization parameters. Am I right on this?
Hi Thierry… In economics, we never answer any Yes/No question with a yes or a no. This is something that has been drilled in to me from many decades ago and it is something that I employ at all times. This is a perfect example.
What did the company invest in via CapEx to get to the point where there is a final outcome? No two companies are going to invest the same way. That makes a big difference.
Some companies are going to replace capital with capital that they already have and this will have no real advantage, but is a necessary evil. For example, and this is a loose analogy, image there are two cities close to each other. Goods exchange between each city. But, the citizens have to travel by foot to get this done. It is slow, cumbersome, and inefficient. But, what if the two cities put in a road or a rail system? All of a sudden goods and services could be exchanged between each city at a far faster clip. There would be a huge difference in productivity. This is a new investment between the two cities. However, later on down the road, there will be maintenance concerns. The two cities will have to pay for this, which is a capital expenditure. But, there are no new advantages to productivity.
Now, translate that into a company that produces cannabis products. If a company adds a new dispensary, this will add new opportunities for revenue in a new area that otherwise individuals previously would have had to travel to in order to buy products. This would be something that adds a lot more revenue to the top line of the company that otherwise would not have been added before. However, what if the same company takes an outdated “look” of a dispensary and refurbishes it to brighten it up? This would be necessary to maintain a feel the company wants that continues to continuously draw in an existing customer base. But, the increase in revenue would be nominal.
CapEx is found in the financial statements under assets as Capital Expenditures are assets (There is not a line item in the financial statement for expenses like this). Because of this, you will not see any deduction that affects Earnings Per Share or EBITDA because of CapEx expenditures. You can only see assets and liabilities. If a company were to add $1,000,000 into a build project, maybe the debt on that is $1M and the asset is $1M. But, after the asset starts to perform, maybe its value to the company increases. And, the company may have paid down some of the debt on the asset so, the liability will be lower than the asset. This is one reason that I am always looking for increasing assets versus decreasing liabilities.
Hope this helps.
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