Thread by @itsTarH

Its the weekend!

Grab a cup of coffee, in this thread I will explain

1. What is Capex?💰
2. What is Free Cash Flow? 💸
3. What does Cash Flow from Investing and Cash Flow from Financing tells us? 💡

Examples includes some famous companies.

Lets dive right in.

If you're new here, this thread is part 2 of an existing chain of threads where I explain the cash flow statement.

Part 1 is available below👇🏼👇🏼👇🏼

https://twitter.com/itsTarH/status/1393476612251787266?s=20

In the previous thread, we learnt about Cash Flow from Operations and why it is one the most important parts of a cash flow statement.

Two remaining parts of cash flow statement include

1. Cash Flow From Investing
2. Cash Flow From Financing

Let's explore Cash Flow from Investing first.

As a reminder, this is what a cash flow statement looks like.

Any cash left over after accounting for working capital needs of the business, is utilized towards cash flow from investing.

Think of cash moving through the business like in a funnel shown below.

Its in Cash Flow from Investing that a business accounts for
a. any Capital Expenditure (CAPEX)
b. any excess cash invested by business in mutual funds, fixed deposits etc. and any income earned from those investments

Lets explore CAPEX first.

*CapEx - is just a fancy term to describe any cash used by the business to invest in itself

Two types of CapEx
1. Maintenance - Any major repairs, wear and tear
2. Growth - Setting up a new plant, expanding a factory, increasing capacity and so on

You can calculate CapEx by taking a net of
Fixed Assets Purchased and Fixed Assets Sold

In the example shown below, the net Capex is 474cr for Dec 2020

CapEx is important to track as

More CapEx = Usually means higher revenues in the future

All businesses need to grow and as they grow *organically* = their stock price starts reflecting this growth

*organic growth = growing without taking on too much debt to fund the growth

Here is an important ratio that can help you to track if the business is growing organically.

CAPEX / CFO

Higher = Bad
Lower = Good

Take this example, from a post written by @Betankrich

The below shows which companies are able to use the cash generated by their business to grow and which ones are using debt to fund their growth.

Link to the post: tankrich.com/indian-cdmos-c…

I should put a caveat here.

Not all businesses require CapEx to grow.
Asset Light software and platform businesses require very light CapEx and can scale massively with little additional investment

Thats why platform and SaaS companies enjoy very high PE multiples.

Take for example, IEX

For the year ending Mar 2021, it has only done 16cr in CapEx for a business that is generating CFO of 304cr.

That's a CapEx to CFO ratio of 0.05

And it was able to grow its CFO by 130% YoY!

After CapEx is accounted for from CFO, what we are left with is called

FREE CASH FLOW (FCF)

High FCF Businesses are chased by investors as they can generate very high cash from operations and even after CapEx, have a lot of cash which can then be distributed to shareholders.

A company has a choice on how to utilize this FCF.

They can either

A. Put this towards cash reserves of the company, to be used later on for acquisitions etc.

B. Distribute it to their shareholders in the form of buybacks and dividends

A great company does both.

If a company chooses option A, then we can track this by checking the Investments Purchased section of the Cash Flow From Investing.

All excess cash of the company is invested into mutual funds, deposits, bonds etc.

Any income generated from these investments is accounted under

Investment Income
Dividends Received
Interest Income

If a company chooses option B, then we can track this under Cash Flow from Financing.

Any money paid back to shareholders will be in the form of

Dividends paid = to shareholders
Interest paid = to bondholders

The last part to cash flow from financing, is the money a company borrows or pays back on its loans.

All of this is accounted for under
Proceeds from Borrowing and Repayment of Borrowings.

With this we complete our exploration of the cash flow statement and all its various moving parts.

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