7.13
Application Using Financial Statements
Reconciliation for 2009:
Cash Flow from
Operations 20,773
CAPEX
Payments for plant,
rental machines and other property (3,447)
Proceeds from
disposition of plant, rental machines and other property 330
Investment in software
(630)
Total CAPEX = 3,747
In addition, IBM has
made an adjustment for the line Item Receivables (including
financing receivable)
resulting in a subtraction from cash flows from
operations of 1.9 billion.
IBM Adjusted Cash Flow
from Operations =
So combined IBM
Management’s estimate for Free Cash Flow is $15.1 billion.
Summary:
Free Cash Flow Firm
= Cash Flow from
Operations - Capital Expenditures (CAPEX)
1)
Free Cash Flow Firm
= 15.1 billion
Remark:
In the above numbers IBM started with cash flow from operations
using US GAAP and then made an adjustment to separate out the
effects of the financing decision from the investment decision.
IBM did not comment separately as to whether this
included an adjustment for interest expense net of tax but given
that they made an adjustment, we will assume that it did.
Tip:
In the above example CAPEX is taken directly from the
accounting statements.
In practice this should still be viewed as a first pass
because the analyst is attempting to assess and understand
future CAPEX behavior.
That is, what are the drivers of CAPEX?
This may result in the average CAPEX over the last 3 or
5-years providing a better estimate than the most recent CAPEX
number. In
addition, further adjustments may be required from your
understanding of the firm’s investment decision if the past is
not a good predictor of future CAPEX behavior.