The Daily Technical #120: What are the three different types of intercompany investments?

Good morning. Welcome to the 120th edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
How would you forecast capex and D&A when creating a financial model?

In the simplest approach, capex is forecasted as a percentage of revenue, while D&A can be projected as either a percentage of revenue or capital expenditures.

Re-investments such as capex directly correlate with revenue growth, thus historical trends, management guidance, and industry norms should be closely followed.

Alternatively, a depreciation waterfall schedule can be put together, requiring more data from the company to track the PP&E currently in use and the remaining useful life of each.

In addition, management plans for future capex spending and the approximate helpful life assumptions for each purchase will be necessary.

As a result, depreciation from the old and new capex will be shown separately.

For projecting amortization, useful life assumptions would also be required, often found in a separate footnote in a company's financial reports.

Common Mistakes

1. Using revenue percentages when they may lack accuracy. Diversify your approach by combining this with other methods, like a depreciation schedule, for more precise estimates.

2. Missing important details regarding the useful life of assets. Check footnotes in financial statements to gather accurate assumptions for current and future depreciation and amortization expenses.

3. Failing to separate old capex versus new. This can result in skewed projections. Use a detailed depreciation schedule to distinguish between existing assets and future investments clearly.

TL;DR

• Forecast D&A as a percentage of revenue or capex; use historical trends and industry norms.

• Project capex as a percentage of revenue, aligning with growth; consider management guidance.

• For detailed accuracy, use a depreciation waterfall schedule, requiring data on current PP&E and useful life.

• Separate depreciation of old and new capex for clarity; track management's future capex plans.

• Extract useful life assumptions for amortization from financial report footnotes..

TODAY’S QUESTION
What are the three different types of intercompany investments?

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