26: How To Calculate Growth Capex

Answering a subscriber's question for the benefit of W.I.N. readers

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A paid subscriber asked me how I calculated growth capex so I thought I’d use today’s Substack post to respond.

First, a definition:

Capex is short for capital expenditures. These are monies spent on long-lived assets. A new building, improving an existing building, a new truck. You get the idea.

Capex can be broken out into two broad buckets: maintenance and growth. Maintenance capex is simply bringing the condition of existing assets back to where they were at the beginning of the year. A building or truck doesn’t last forever; depreciation is a real expense. (A caveat here is that maintenance capex can be greater than depreciation if the cost of assets increases during the year. Same equipment, same unit output, higher cost. The reverse can also be true due to technology gains. But I digress…).

Anything above and beyond maintenance capex is growth spending. This is an investment in the future of the business. An additional truck, a new service center, etc. It can even be software. Here’s a table from the October issue on Old Dominion Freight Line:

Negative numbers are uses of cash. Positive numbers are sources of cash.

You can see that in every year except 2020 the amount was negative. This means ODFL was investing more in its business than depreciation expense in efforts to grow the business.

Here’s where the numbers come from in the ODFL 10K. We take depreciation/amortization, subtract purchases of property/equipment, and add back proceeds from the sale of property/equipment. (Note that the gain/loss on the sale of equipment is irrelevant because we only care about cash.)

We can see the growth in the business in the table below in terms of unit volume and revenues. We can also see the relatively linear relationship between capital spending and revenues in the bottom table. ODFL has gotten slightly more capital intensive over the past ten years but its margins have more than made up for it.

I really appreciate F.G. asking the question that led to this post. If anyone has questions about a specific company I’ve covered or even how-to questions like this where I go into how a number is calculated, I’d welcome an email or comment.

Stay rational! -Adam