A question about CAPEX when Calculating Free Cash Flow (FCF)

Question

When performing the following to determine free cash flow:

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Do I include only Capital Expenditures (13,732 in the example below), or do I also include Capitalized software expenditures, cash paid for acquisitions, and Other items, net?

This obviously makes a big difference in the calculation.

Example:

Capital expenditures (13,732)
Capitalized software expenditures (26,916)
Cash paid for acquisitions 0
Other items, net (143)
    Cash used for investing activities (40,791)

Some of the financial APIs I am pulling data from vary greatly in the returned capex dollar amount. Some include Capitalized software expenditures, others don't include it but include Cash paid for acquisitions and Other Items, net. None of the APIs I have looked at include everything.

If everything, why wouldn't the equation be?

Free Cash Flow = Operating Cash Flow - Cash used for investing activities

I understand there are other equations to determine this. I'm specifically asking about this.

Thanks,

Answer 1

In general, FCF should measure recurring free cash flow, so some items included in "investing activities" should not be included if they are one time expenses (like acquisitions). It's normal for a company to separate purchases of land, property, equipment, etc. from capitalized software, partly because CAPEX generally means the purchase of tangible assets that can be re-sold. If the software purchases are recurring, then they should be included.

Since there's no way to know if "Other items" is recurring or not, it's hard to give a definitive answer on that one.

Unfortunately for you, there may not be a black-and white answer as to what to include. Sometimes you'll include software, sometimes you won't. That's why investment analysts study for years to understand how to compare financial statements.