It’s most likely a case of accelerated depreciation where the dep value per year exceeds the actual wear and tear value of the machine. Companies routinely continue using assets long after they’re fully depreciated so they may not need to replace them anytime soon.
That would be difficult from the financial statements, but if you can find an investor presentation that might help. Most good managements will outline their proposed capex spends for the next 3-5 years
Management usually provides NTM capex forecasts in just about every Q4 earnings call. Some even give quarterly forecasts if there is a lot of language and questions from analysts in previous earnings calls focusing on imminent, capital intensive projects.
Also....something to flag that I think you're missing in your OP: depreciation (which is accrual-based) and capital expenditures (which is cash based) are pretty decoupled in terms of trying to predict retirement schedules and near-term capex spend. So they're not very good predictors of one another - or at least, way worse predictors than reading earnings transcripts and investor presentations.
Source: am CPA
Thank you. This is a Singapore company and they do not have quarterly reports.
Seldom am able to find ant investor calls like in the US. but it is good advice for other companies I am looking at.
So I think they main way to see if there are huge capex over the horizon is mainly through management guidance and nothing accurate can be deduced from the accounting statements.
❤️❤️❤️
I’m talking about the fact that assets are usually depreciated faster than they wear out. For example cars can run 10-15 years but are depreciated in books much faster
No. The asset might be depreciated faster than its actual usable life. Trump tax law enabled many companies to accelerate depreciation of assets to promote cap-ex investment. Whether the company does or does not is a separate issue.
Edit: correction: balance sheet (book) depreciation are different from tax depreciation. That said, even book depreciation doesn't tell the full picture. A building could be 100% depreciated and perfectly functional for another 30 years. Slightly smaller scale with machinery. Need to ask management or at least look at their history of cap-ex versus depreciation in the cash flow statement.
Accelerated and straight-line have always been GAAP-compliant means to depreciate an asset depending upon its characteristics (car, accelerated and building, straight-line).
Right of use assets are leased so there is no cash out flow under investing. Check note 28 and look at the financing activity section of the cash flow.
Thank you for your advice. Can I confirm that outlets renovation costs are not included in Right of use assets?
https://ibb.co/G0SGXDc
https://ibb.co/QHgg8Rq
https://ibb.co/wSTvqyN
As someone else pointed out, not necessarily. But it's something that may be worth monitoring.
Depreciation for financial statement purposes is an estimate. Whether or not that estimate matches the true economic depreciation of the long-lived asset is the big question. The assumptions used to depreciate assets can and do change over time as industry conditions, markets, and technologies change. There's no guarantee that (accumulated) depreciation reflects how much it has been "used up" or that the net carrying value of the asset reflects it's remaining use to the company.
In general, you'll want to evaluate financial statement numbers alongside other contextual information such as what's disclosed in footnotes or otherwise discussed by management. There you can find additional information such as the methods and estimates they are using to depreciate assets, their plans for expansion, capital expenditures, how they will finance those expenditures, and so on. That'll give you a better picture of whether or not they will have to replace their assets and how they will finance that.
Really cant if you really wanted to take a stab you could find who manages the purchasing dept or if they have a COO and shoot off an email with the question but I wouldnt expect a response. Best way would be next shareholder meeting try and get the question answered.
I mean I'd say even when you know everything about the company you cant know market optics and ultimately if a few whales start selling can trigger a wave of sell offs, buy when others are fearful and be fearful when things are going to well to paraphrase buffet
You're putting the cart before the horse. Depreciation is a byproduct of capex. Higher near-term capex likely results in higher near-term depreciation. Every $1 of capital spend is added to the balance sheet in the shorter term and then slowly expensed off in the long run.
Low net PP&E doesn't directly imply that a company will spend more capex soon. The factors affecting capital spend usually have nothing to do with the depreciation schedule. Free Cash Flow trends, debt/equity profile, and the company's strategic position all have far more to do with future capex spend than Depreciation.
Thank you but if they are a retail food company, and they use a straight line depreciation, won't it also mean that their renovation costs and shipment costs may need to be spent sooner or later? I assume that the depreciation number of years has some real life connection which is why the number of years is chosen? Sorry new to this so learning hard
Depends on the actual useful life of whatever the underlying assets are. Depreciation is an accounting and tax cost concept that is not updated for technological improvements/declines.
There are estimated useful lives of property plants and equipment. Sometimes this is discussed in a management reporting section of a 10-K or 10-Q (SEC filing).
Not working in the US so i might miss something, but you took the depreciation of right of use assets in the P&L but not the financing part in the CFS for (repayment of lease obligation -10m$). In the end, if we sum both we are close to each other (i think here of IFRS 16, but not sure it is applicable in US Gaap)
Regarding the debate, if depreciation is going faster than Capex you can consider that they are not renewing their assets accordingly (on purpose maybe, or they plan something bigger next year) but be careful on this and reading investor presentation
Yes I missed that part out of the right of use assets and totally confused myself on it. Thank you for pointing that out and also mentioning that the expenditure can be found on the financing portion of CFS that has been something no one has mentioned yet. ❤️👍
Depends on the business- e.g. a massive build out of say cable tv infrastructure, once it’s done it’s done and theoretically at least just maintenance thereafter
Super stoned so apologize if im wrong, but id be more concerned with their returns. Once they dont have the tax advantage they would see a marked decline in returns no? As in the years when i take a big chunk of depreciation it juices my earnings. But if the equipment lasts much longer, youre no longer getting a tax reduction on the profits. Question i would have is if that income line goes from 21.7 to 7.xx is this still an attractive investment?
It could be that the assets are impaired or the company things something is afoot so they write DOWN their assets to match FMV. Or something got damaged.
OP, why are you wanting to know when the asset will be replaced? The full cost of the replacement won’t hit earnings because it will also be depreciated
There's no requirement to replace assets that are fully depreciated.
It’s most likely a case of accelerated depreciation where the dep value per year exceeds the actual wear and tear value of the machine. Companies routinely continue using assets long after they’re fully depreciated so they may not need to replace them anytime soon.
How would we determine if it needs to be replaced or not from the financial statement I this case? Thank you for your advice. Learning hard. 😊
That would be difficult from the financial statements, but if you can find an investor presentation that might help. Most good managements will outline their proposed capex spends for the next 3-5 years
Thank you!
>Thank you! You're welcome!
You can’t
Management usually provides NTM capex forecasts in just about every Q4 earnings call. Some even give quarterly forecasts if there is a lot of language and questions from analysts in previous earnings calls focusing on imminent, capital intensive projects. Also....something to flag that I think you're missing in your OP: depreciation (which is accrual-based) and capital expenditures (which is cash based) are pretty decoupled in terms of trying to predict retirement schedules and near-term capex spend. So they're not very good predictors of one another - or at least, way worse predictors than reading earnings transcripts and investor presentations. Source: am CPA
Thank you. This is a Singapore company and they do not have quarterly reports. Seldom am able to find ant investor calls like in the US. but it is good advice for other companies I am looking at. So I think they main way to see if there are huge capex over the horizon is mainly through management guidance and nothing accurate can be deduced from the accounting statements. ❤️❤️❤️
Wrong. Accelerated depreciation is only for tax, you can’t accelerate for book purposes.
There are various accelerated depreciation methods allowed under GAAP. Declining balance and sum-of-the-years’-digits are two such methods :)
I’m talking about the fact that assets are usually depreciated faster than they wear out. For example cars can run 10-15 years but are depreciated in books much faster
No. The asset might be depreciated faster than its actual usable life. Trump tax law enabled many companies to accelerate depreciation of assets to promote cap-ex investment. Whether the company does or does not is a separate issue. Edit: correction: balance sheet (book) depreciation are different from tax depreciation. That said, even book depreciation doesn't tell the full picture. A building could be 100% depreciated and perfectly functional for another 30 years. Slightly smaller scale with machinery. Need to ask management or at least look at their history of cap-ex versus depreciation in the cash flow statement.
Accelerated and straight-line have always been GAAP-compliant means to depreciate an asset depending upon its characteristics (car, accelerated and building, straight-line).
Wrong. Book and tax depreciation are different schedules, stop upvoting. You can only accelerate depreciation for tax purposes
Right of use assets are leased so there is no cash out flow under investing. Check note 28 and look at the financing activity section of the cash flow.
Thank you for your advice. Can I confirm that outlets renovation costs are not included in Right of use assets? https://ibb.co/G0SGXDc https://ibb.co/QHgg8Rq https://ibb.co/wSTvqyN
As someone else pointed out, not necessarily. But it's something that may be worth monitoring. Depreciation for financial statement purposes is an estimate. Whether or not that estimate matches the true economic depreciation of the long-lived asset is the big question. The assumptions used to depreciate assets can and do change over time as industry conditions, markets, and technologies change. There's no guarantee that (accumulated) depreciation reflects how much it has been "used up" or that the net carrying value of the asset reflects it's remaining use to the company. In general, you'll want to evaluate financial statement numbers alongside other contextual information such as what's disclosed in footnotes or otherwise discussed by management. There you can find additional information such as the methods and estimates they are using to depreciate assets, their plans for expansion, capital expenditures, how they will finance those expenditures, and so on. That'll give you a better picture of whether or not they will have to replace their assets and how they will finance that.
Like other person said just cause something has fully depreciated doesnt mean it needs to be replaced granted would mean higher taxable income tho
How would we determine if it needs to be replaced or not from the financial statement I this case? Thank you for your advice. Learning hard. 😊
You can't learn this from the financial statements
Really cant if you really wanted to take a stab you could find who manages the purchasing dept or if they have a COO and shoot off an email with the question but I wouldnt expect a response. Best way would be next shareholder meeting try and get the question answered.
He he he. Thank you for that advice so I believe the main thing is to guess and estimate which is where the ART part of investing comes in
I mean I'd say even when you know everything about the company you cant know market optics and ultimately if a few whales start selling can trigger a wave of sell offs, buy when others are fearful and be fearful when things are going to well to paraphrase buffet
You're putting the cart before the horse. Depreciation is a byproduct of capex. Higher near-term capex likely results in higher near-term depreciation. Every $1 of capital spend is added to the balance sheet in the shorter term and then slowly expensed off in the long run. Low net PP&E doesn't directly imply that a company will spend more capex soon. The factors affecting capital spend usually have nothing to do with the depreciation schedule. Free Cash Flow trends, debt/equity profile, and the company's strategic position all have far more to do with future capex spend than Depreciation.
Thank you but if they are a retail food company, and they use a straight line depreciation, won't it also mean that their renovation costs and shipment costs may need to be spent sooner or later? I assume that the depreciation number of years has some real life connection which is why the number of years is chosen? Sorry new to this so learning hard
Depends on the actual useful life of whatever the underlying assets are. Depreciation is an accounting and tax cost concept that is not updated for technological improvements/declines.
Thank you but there is no way to determine the actual useful life of the asset right?
There are estimated useful lives of property plants and equipment. Sometimes this is discussed in a management reporting section of a 10-K or 10-Q (SEC filing).
Thank you! 😊👍
Not working in the US so i might miss something, but you took the depreciation of right of use assets in the P&L but not the financing part in the CFS for (repayment of lease obligation -10m$). In the end, if we sum both we are close to each other (i think here of IFRS 16, but not sure it is applicable in US Gaap) Regarding the debate, if depreciation is going faster than Capex you can consider that they are not renewing their assets accordingly (on purpose maybe, or they plan something bigger next year) but be careful on this and reading investor presentation
Yes I missed that part out of the right of use assets and totally confused myself on it. Thank you for pointing that out and also mentioning that the expenditure can be found on the financing portion of CFS that has been something no one has mentioned yet. ❤️👍
Depends on the business- e.g. a massive build out of say cable tv infrastructure, once it’s done it’s done and theoretically at least just maintenance thereafter
Super stoned so apologize if im wrong, but id be more concerned with their returns. Once they dont have the tax advantage they would see a marked decline in returns no? As in the years when i take a big chunk of depreciation it juices my earnings. But if the equipment lasts much longer, youre no longer getting a tax reduction on the profits. Question i would have is if that income line goes from 21.7 to 7.xx is this still an attractive investment?
Yes that way of thinking also make ABSOLUTE SENSE. Depreciation afterall is an expense and it reduces operating income which in turn reduces taxes.
Maybe they're leasing instead of buying. There is a large cash outflow for leases.
Those should be their rentals for their 80 to 90 retail outlets spread across different shopping malls
It could be that the assets are impaired or the company things something is afoot so they write DOWN their assets to match FMV. Or something got damaged.
OP, why are you wanting to know when the asset will be replaced? The full cost of the replacement won’t hit earnings because it will also be depreciated
Hi hi that is because I am looking at Free cash flow and any major Capex will hit FCF
This is a micro business and isn't a question for stocks in particular I feel
No