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
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


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