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EBIT / Enterprise value

,,For purposes of the study and in the interest of simplicity,it was assumed that depreciation and amortization expense were roughly EQUAL to MAINTANANCE capital spending.

It was, therefore, assumed that EBITDA - Maintenance Cap/Expenditures = EBIT. ,,

page 139,Little book that beats the market 


This assumption that amortization + depreciation = MAINTENANCE cap. expenditures is out of reality.

1.Companies in capital intensive industries have MAINTANENCE capital expenditures x times higher than amortization + depreciation.

2.Companies that are based on properties have MAINTANENCE capital expenditures much lower than amortization
+ depreciation


If you browse all ,,magic stocks,, with minimal market cap. 1 million dollars you get among 25 top companies these :

PNCL-airlines

FTO- oil refinery
WNR-oil refinery

PPD-legal services 

If you look at their 10k report you get that their MAINTENANCE capital expenditures are x times higher than their amortization + depreciation

Next time you check the magic list of bargains, ask yourself: are there MAINTENANCE capital expenditures really equal to amortization + depreciation ?  


Nice article about proper measurement is this:
http://members.forbes.com/global/2003/0317/024.html 

and about capital intensive industries here:
http://www.johnkay.com/industries/409 
Warren Buffett, Airlines and 800 Numbers 


  
 



You brought up an issue that

You brought up an issue that seems to be widely misunderstood.
I sometimes run into difficulties when calculating the maintenance capex number. Companies have to disclose some information in the footnotes, but you barely see an exact number.
How do you normally calculate maintenance vs. "growth" capex?

Jan

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CAPEX

Im usually looking for the sentence - this part of capex will finance our next growth.


I was wondering why Greenblatt didnt have JOSB on his list and I think it is because of the mistake in his formula.The company puts almost all its money into opening of the new shops and has their pure maintenance capex much lower than is the amortization and depreciation.It means their EBIT is much higher than his formula assumed. 


If you look at their 10k

If you look at their 10k report you get that their MAINTENANCE capital expenditures are x times higher than their amortization + depreciation mephisto sandals | sanuk sandals | naot sandals

.The company puts almost all

.The company puts almost all its money into opening of the new shops and has their pure maintenance capex much lower than is the amortization and depreciation.It means their EBIT is much higher than his formula assumed. accelerated bsn - loan forgiveness for teachers - loan deferment - student loan deferment

Capital Expenditure - CAPEX

The amount of capital expenditures a company is likely to have depends on the industry it occupies. Some of the most capital intensive industries include oil, telecom and utilities.

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But note he is only doing it

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I like dollar

capex 2.0

The longer you think about it,  the question about capex is getting more and more subtle. Greenblatt's formula combines ROIC and the earnings multiply. Indeed, in the EBIT number excess capex is neglected but it is in the ROIC number! By definition, a capital intensive business should show low ROIC and wouldn't show up on Greenblatt's list. An issue could be former high ROIC- companies that have to put up more and more capex each year.  An addition to the "magic formula" should therefore include a "ROIC- momentum" factor.
BTW, I am not a true believer of static models etc....

Pelcmarek, I get your idea on JOSB. Speaking of retailers: how do you deal with working capital adjustments. When the inventory growth cuts off a decent part of OC (due to store growth etc), what number do you substract from the OC? Some kind of "maintenance inventory expense" ?

Thx,

jan


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