CAPEX and FCF with high Right-of-use assets
Hi everyone!
I'm doing an equity valuation of a luxury apparel company, and after IFRS 16 they also started to account for right-of-use and lease liabilities. The problem I encountered is this one: in 2018 they obviously have 0 under the RoU line, while in 2019 that number jumps to ~400mm. This makes the FCF result for 2019 completely nonsense since CAPEX (RoU and intangibles included since they are amortized as well) is something like ~500 mm and subsequently the FCF is insanely below zero (which shouldn't be according to the other equity reports of top banks and the company). Do you have any hints on how to solve this problem?
Thanks!
ROUs shouldn’t really be in capex as there isn’t an outflow of cash to obtain them - there’s a corresponding lease liability. Look for the actual cash rent expense disclosed in the notes and adjust accordingly when calculating FCF.
Thank you! I tried and even if I adjust for the cash expense (which should be called "Decreases for payments made") of that year, that expense is higher than the corresponding D&A for the RoU and the FCF is not correct. I also tried to use the CAPEX declared by the company and used by the banks, but here the problem is that form 2019 onwards the CAPEX figure is lower than D&A, which is in my opinion impossible given the fact that the company's asset base is growing and not diminishing
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Only seen this under GAAP, but what's the corresponding ROU asset? That should be in OCF too, which would balance out your addback from the liability increase
ROU asset and ROU liability shouldn't be that different except for the effect of level rent relative to lease expense. Just using the balance sheet I imagine there might be some leakage in the initial booking of the both the ROU asset and liability that hits Net Income or Retained Earnings, but nothing you'd probably be able to do with a standard Annual Report / 10-K
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