Capital Expenditures How Do They Impact Value?

The annual capital expenditures of a business tell a lot about the operating and growth philosophy of a business. Furthermore, there are two types of capital expenditures that a company makes; sustaining capital expenditures and growth capital expenditures. Maintenance capital expenditures represent replacement of retired and outdated machinery and equipment. These expenditures are required to sustain the existing level of business operations. The average annual capital expenditures that fall into the maintenance category roughly represent the annual depreciation that is expensed on the assets. For a company that has been experiencing relatively low growth and stable earnings, we would expect to see relatively consistent annual capital expenditures. On the other hand, a company that is growing or has growth plans would have capital expenditures that are greater than the average depreciation expense. This shows investment in the business over and above the status quo. We often see businesses with stated growth plans that are rather aggressive, but are not matched with corresponding historical or planned increases in capital expenditures. This shows that the company is just hoping for growth instead of truly creating it. Capital expenditures can impact value in two key ways. If ongoing maintenance capital expenditures are consistent and represent a significant component of otherwise discretionary cash flow, this shows a relatively capital intensive business or a business with a slate of older assets that need replacing, and cash flows would be adjusted to show the ongoing nature of these cash outflows. This would reduce the value compared to a business that is not capital intensive or has a newer group of assets with a longer life and a delayed requirement for additional investment. If on the other hand the capital expenditures are fairly lumpy and are followed by periods of growth, this shows a business that is building capacity and although capital expenditures would be considered in forecasting future cash flows, future cash flows would reflect a growth profile because of the consistent investment in additional capacity.

Capital Expenditures How Do They Impact Value?

ABOUT EQUICAPITA
Equicapita is a private equity fund that acquires established, private, small and medium sized enterprises (SMEs) located primarily in Western Canada. Equicapitas investment drivers are to acquire operating companies at attractive valuations, with a history of generating sustainable cash flow and proven management teams. Equicapita believes that there is: - a generational opportunity to acquire baby boomer SMEs; and - a funding gap in the $2 to $20 million enterprise value range. The retirement of baby boomer business owners has been described as triggering one of the biggest transfers of corporate assets on record in Canada. This creates an environment with an abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash flow multiples. Equicapita provides investors with access to this alternative asset class via an efficient RRSP eligible structure.

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Capital Expenditures How Do They Impact Value?