Negative CAPEX and WC

second this question.

negative change in WC means a decline in AR/Inventory and a rise in AP. So your sources of cash are increasing.

but what exactly is the implication of that?

One cause of negative WC is merely that CL > CA, so the firm is unable to pay off CL with cash, etc.

For example, supermarkets.

Its very possible to have negative working capital. It depends on the credit structure in the industry and the company business model.

Negative CapEx... not so much. Since its by definition an expenditure how would you have an inverted CapEx?

It would be the sale of an asset, in which case you'd see it on the CF statement as proceed from the sale of assets.

CapEx generally consists of maintenance CapEx and growth CapEx... logistically, it just doesn't make sense to have negative maintenance CapEx (i.e. someone is paying you to upkeep your PP&E) or negative growth CapEx (i.e. someone is paying you for you to take an assets).

If anyone has a different view, feel free to share.

Walmart is famous for its working capital. It's just: collect payment immediately at sale, turn over inventory in XX days, pay vendors in XX + YY days. The implication is they have stupid amounts of cash, limited debt, and want to open a bank.

Kote:

Just to be clear, you are saying that they turn over inventory in 10 days (having already collected cash), but pay vendors in 20 days (numbers are hypothetical).

Meaning for days 11-20, A/P is up while A/R-Inventories are down after day 10 and working cap is negative.

I cannot think of a situation where negative capex is plausible. Even if you were paid to maintain someone else's PP&E, chances are you are an operator and that fee would be part of your revenue and have nothing to do with capex. The operator would still have their own capex for maintaining their headquarters, replacing carpet cleaning equipment, whatever. This relationship is very common with REITs and third party property management companies.

Negative capex is impossible. Only thing I can think of is that the OP could be referring to a situation where capex

CapEx net of asset dispositions can be negative. This happens in rental businesses. Is that what you're referring to?

what are some of you talkign about? negative capex is completely possible. if the value of the assets you acquire in a certain period is less than the amount you received from dispositions, your NET capex is negative.

working capital can also be negative. that's what revolving credit facilities are for.

What are you talking about? Capex represents the amount you spend to acquire assets to expand your asset base or refurbish your existing one (thus still contributing to total asset value). You are referring to netting capex against asset sales which is not capex but rather net contribution to PP&E. Net contribution to PP&E can indeed be negative, but capex cannot.

i know what capex is. i have been in banking for three years. it is extremely common for companies to use "net capital expenditures" in their credit agreements for covenant purposes. i am trying to make my answer as "real world" for the OP as possible.

Negative working capital is rare but it is certainly possible. When a company is paid in advance for services that will be performed over a period of time, the payment acts as a free loan, creating negative WC.

By CAPEX, I mean the one used to calculate FCF. I'm not really sure if that is just the amount spent on PP&E or if it is a net amount.

Anyways, I have spoken to a friend about this before and he told me that negative CAPEX is possible if the firm sells assets.

The main reason why I ask this is because I forecast CAPEX based on %sales. So, in years when sales are expected to fall (recession, etc.), I get a negative CAPEX. I am still trying to wrap my head around what exactly that means, though.

If negative CAPEX is impossible, then I'll just set =MAX(0, calculated CAPEX) on my Excel spreadsheet.

I too have been in banking for three years in real estate, the industry with possibly the highest prevalence of asset dispositions. In "real world" applications, a figure that nets capex against asset dispositions is useless because you will still model each line item separately and that net amount will vary widely from year to year in many industries.

"The main reason why I ask this is because I forecast CAPEX based on %sales. So, in years when sales are expected to fall (recession, etc.), I get a negative CAPEX. I am still trying to wrap my head around what exactly that means, though."

I don't understand how you are getting a negative capex figure if you're modeling it as a % of sales. Let's say sales decline from $2 mm to $1 mm and capex is 2% of sales, it would still be positive. Even if you model capex growth based on sales growth, you'd simply have a smaller capex figure than the prior year, not negative.

"In "real world" applications, a figure that nets capex against asset dispositions is useless "

Uh, it's not useless from a cash point of view.

1. not really sure what bank you work at, but netting capex against asset dispositions is not "useless", especially if you work in leveraged finance where cash generation is paramount. if company x has a 700mm maturity coming due next year and they're sitting on little cash but a boatload of pp+e/property, guess what happens.

2. from what the OP has said about having negative capex in his model - it sounds to me like you're modeling capex off sales growth instead of as a % sales itself. check your formula.

Agree with Marcus on his % of sales comment.

I suppose the only negative CapEx example I could think of would be if a company recorded tooling expense as CapEx and its customers reimbursed for tooling at a set-rate rather than the actual rate.

One of our portfolio companies does get reimbursed for tooling expense by its customers, though the reimbursement typically falls short of the actual expense.

Or issue equity. Read the use of proceeds of most FO / ATM offerings in the corresponding prospectus; 95% will list a combination of "general corporate purposes," acquisitions, or the reduction of debt. Or you issue more debt and effectively roll back the maturity schedule. Selling assets in most non-real estate industries is a last resort used when leverage or ECM concerns prevent the aforementioned options. Don't give me this "I'm not sure what bank you work at" crap, you act like asset sales were the obvious solution for an upcoming debt maturity.

None of this changes the fact that: A) There is no negative capex B) The whole reason for this thread came from a simple modeling error by the OP (I am implying this from his later statement)

Also, let me know how to fix the modelling error.

That's all? How about the %sales thing?

Also, for the APV's FCF formula FCF=EBIT+Depr-CAPEX-Ch. in WC, should the CAPEX be a positive or negative number?

Ha ha. yeah. Well, it all makes sense now.

But, WC can be negative right?

Capex should be a positive number in the FCF formula because it is a cash outflow that reduces your free cash flow. To make things explicit:

EBIT 1000 Depr 200 Capex 300 Delta WC 400

Using your formula: FCF = 1000 + 200 - 300 - 400 = 500

While capex is positive, the effect on your FCF is negative.

Edited

It really will depend on the company in question. For example, some companies will only keep cash on hand equivalent to what they need to survive -- i.e., this should be included in working capital. However, look at a company like Microsoft -- they have billions of dollars in cash lying around, but they really only need a small fraction of that to function as a company. From what I've seen, you generally exclude cash from the initial working capital calculation, and then determine a sufficient cash balance (i.e. minimum cash balance) needed to maintain operations.

I would say every company has a necessary working capital balance that it must maintain. The plug to achieve that balance is cash. Excess cash is not included in the calculation of working capital.

Yeah, I guess that could be a fine line. But when it comes down to it, cash is not a working capital item. Because working capital isn't paying wages and taxes and law suits and legal fees and postage etc... working capital Is really just trade capital... which its also sometimes called. So its the capital you need to buy from suppliers and sell to customers.

I've in the past just used a minimum cash balance which is based on some sort of management estimate and used that as a minimum cash amount, swept all other cash to revolver etc...

I mean if you really want to get into all this BS... is not Revolver Availability WC then too?

How do I determine safety cash vs. excess cash? I usually count all cash on the balance sheet as safety cash, as 1) that was how I was taught and 2) most companies have a relatively stable cash balance.

That's not really your determination to make, it would generally be given by management. However, in calculating FCF, you would NEVER consider any cash balance -- safety cash or excess cash. For the purposes of the change in working capital number to calculate FCF, cash is always excluded.

EDIT: Determining the necessary cash balance can be difficult without management guidance. I would generally say you need management guidance, but if you're desperate, you can look at the company's financials when they were in a period of very fast growth (i.e. spending as much as possible) and check out their cash balance. They'll generally maintain the bare minimum cash balance, and there you can see what balance is necessary to make the company's working capital sufficient. Even then, there are issues -- i.e. companies will raise funds and sit it in their cash balance and slowly spend over time, and as companies mature, their working capital requirements very often change (and we hope they change in a positive way).

And don't forget... WC based on quarter end numbers may be totally understating peak working capital requirements during the quarter.

Unless you think that managements don't manipulate the balance sheet at quarter end (Repo 105 anyone?).