How do you calculate Maintenance Capex?
In the 1986 Berkshire Annual Shareholder letter, Buffett outlined his thoughts on Owner's earnings.
Owner's earnings = Reported earnings + Depreciation & Amortization - avg annual maintenance capex
In the 1986 Berkshire Annual Shareholder letter, Buffett outlined his thoughts on Owner's earnings.
Owner's earnings = Reported earnings + Depreciation & Amortization - avg annual maintenance capex
First 2 component of Owner's earnings are easy to pick up from P&L statement but how do you get maintenance capex number?
Well, generally there is a stable relationship between the level of sales and the amount of plant, property, and equipment (PPE), net of depreciation.
Well, generally there is a stable relationship between the level of sales and the amount of plant, property, and equipment (PPE), net of depreciation.
Let us find out maintenance capex for PI Industries -
We need to calculate PPE/sales number. This tells us how much for PPE is needed to generate 1 unit of sales.
Average PPE/sales for PI Ind is 0.43 i.e. for every 100 Rs of sales, PI Ind needs ~43 Rs worth of PPE.
We need to calculate PPE/sales number. This tells us how much for PPE is needed to generate 1 unit of sales.
Average PPE/sales for PI Ind is 0.43 i.e. for every 100 Rs of sales, PI Ind needs ~43 Rs worth of PPE.
Since revenue increased by 723 Cr between FY21 to FY22, the amount of capex that caused this increase in sales, growth capex, is 0.43x723 = 313 Cr. Net change in PPE during this period was 465 Cr hence -
Maintenance Capex = Total capex - Growth capex
Maintenance Capex = Total capex - Growth capex
So PI Ind spent ~152 Cr on maintenance capex.
Maintaining PPE, however important, does not grow the business. So higher the maintenance capex, lower the owner's earnings. Also, net income figure does not take into account what the co is doing with its cash.
Maintaining PPE, however important, does not grow the business. So higher the maintenance capex, lower the owner's earnings. Also, net income figure does not take into account what the co is doing with its cash.
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