Why is the Capex calculation not adding up for TCS, Glenmark?


I am trying to calculate capex for various companies via direct and indirect methods. But both methods yield wildly different results. And I am not sure what am I doing wrong.

I will illustrate both methods with example of Glenmark Pharma.

Method 1 - Just pick capex from “Cash flow from investing” under Cash flow statement. For FY 22, the number would be (-790+2). Sold fixed assets worth 790 cr. and bought worth 2 cr. So net capex is 788 cr.

Method 2 - Try to calculate from Income statement and balance sheet. Formula would be (Fixed Assets + CWIP) in FY 22 - (Fixed Assets + CWIP) in FY21 + Depreciation in FY22. This would yield 873 cr. For other years, the results are even further apart.

I know from their presentations that the first method returns more accurate results but I am not able to figure out why the second method doesn’t work. More importantly, how are their fixed assets increasing faster than their cash outflows to Capex. I also tried this in TCS and results were similar.

Any help would be greatly appreciated.

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Did you take into consideration the cash reserves the company has and also if cash from borrowing activities have gone up to the tune of extra capex by a company. Also if you want a more accurate figure of caoex, you can wait for their annual reports or concalls where they elaborate more on their capital expenditures. It may also depends upon what a company does. Capital Expenditures can be different for different companies.

Ofc I might be wrong but I have followed this thesis and it has worked for me.

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Thank for your suggestions.

I agree with checking the annual reports / concalls for capital expenditure numbers.

Although that doesn’t solve the problem I described above.

Cash reserves are on the balance sheet and they are not considered in Capex Formula.

Cash from borrowing is shown under Cash Flow from Financing and is also not considered under Capex calculation.

The fundamental issue here is that Capex calculated from Cash Flow statement and (Income + Balance Sheet) statement should yield similar results. But they are not.

Another way to describe the problem is - Company is claiming that there was an outgo of Rs. 500 cr. in fixed assets during a given year. But when you look at Net Fixed Assets - there is an increase of Rs. 800 cr (adjusted for Capital Work in Progress and Depreciation). So where is the balance 300cr coming from?

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Capex can have non cash elements and elements that don’t show up on income statements.
1)If a machine is bought on credit, it’s not still affected the cash flow
2)interest on loans taken for the capex can be capitalised, however this will not show up anywhere in cash flow and income statement as it’s many times not repaid until the asset is put to use. So this is not yet hitting the cash flow or the income stmt

In your verification method, I think you are taking the fixed assets table from the annual report and the figure there show as capex or wip, you are trying to arrive at that figure using first the cash flow and then using the income statement. However both these methods will miss to account for all additions

This is an area where discrepancies are difficult to pass audit. Most discrepancies that show financial fraud will be things like office rent being same for 100 staff and then subsequent expansion to 1000 staff.
The audit process doesn’t easily catch these discrepancies as they mostly audit large year to year difference but don’t ask a question like if your revenue has increased 2 times why has your advertising not increased by atleast 20-30%

If the advertising were to increase in like with revenue increase, the auditors will nevertheless question it, they won’t make an effort to add 2 & 2 together

So as investors in my humble opinion our research should be so see discrepancies outside of double entries. On the double entries itself there is not much room available to cook the books.

Most historic frauds kept big items out of the double entry books altogether. So if you take a figure in the balance sheet, it will have a corresponding figure somewhere. Your thoughts “Does reported figure makes sense?” Is correct. But in searching for the answers you have to stop looking at the figures in the annual report because the second part of that number is definitely captured and explained to the auditors.

Look at revenue, rest of the interest added to income statement. Maybe they are capitalising all their interest, not just the loan used for capex.

In the above if you just add all the numbers, the money, loan, interest, you’ll get the capex. But the question should be, does the interest here makes sense.

Sorry for the long winded message

Thank you, I was not aware there was something as non-cash capex.

I needed Capex numbers for my Free Cash Flow calculations and was wondering whether I should use direct or non-direct method.

I looked at concall transcripts and management was quoting the number mentioned in cash flow statements (cash flow on fixed assets). These numbers were almost always lower than number you’d deduce from the balance sheet.

I must say I was not looking at it as fraud because someone would have blown the whistle on that but I was just curious why the numbers are not adding up. But I must say, I find this kind of reporting misleading.

After reading your reply, I googled “non cash capex” and found this 10 pager.

It explains “Non cash investing and financing activities” - I think exactly what I was looking for. It outlines a few examples where a financier pays for fixed assets on behalf of buyer to seller. So the buyer never records a cash outflow - just transfers the loan as long term debt on its balance sheet. I guess it’s just their way of capitalising their capex.

I think (atleast in some cases) companies do these kind of tricks to make their free cash flow seem higher.

As investors we need to limit research as we have around 2k companies and the auditors have probably 50 client each manager and the accountants have 1 company to worry about

Why do something they are already doing well. Instead concentrating on areas where fraud could happen you then don’t need to check a whole lot of things

If you are a pilot you rely on ground staff doing their maintenance. All you need to worry about is the controls reporting anamolies. As a pilot if one would have to worry about everything under the hood, a pilot would never be successful
Yes an investor can earn infinitely more than a pilot but the job although looks easy is not.
I would look at numbers only to check if fraud exists. If there is no fraud on some of the key variables we take numbers at face value and consider what can in the future re rate this stock