I would defintely include amortisaiton given it includes the Lottery Corporation's fee - clearly a real expense to the business. I think you often have to look at the economics and the line items and ask the question which of these costs are real and recurring costs to run the business ins. It's the Warren Buffett's 'owner earnings' explained here 042.Owner-Earnings-vs-Free-Cash-Flow.pdf

I think it is more decision useful and gets at what you are really trying to understand - what cash can you take out as an owner of the business while ensuring it remains sustainable.

I have a different view - that "capex" referred to and paid to the Lottery Company has been already spent, and therefore the amortisation represents writing that off over time (i.e. it's a non-cash expense). If you add it in, I think it's double counting if you're trying to get to Free Cash Flow. If you're going out past 2030 though, I'd factor in the renewal of this licence in a lump sum at that time.

Generally, amounts paid for P,P & E (or in this case intangibles) is Capex and will be in the investing cash flows section of the cash flow statement for any company. When people use Depn/Amort for Capex, that is just a shorthand way of getting to the Capex amount. If you are using that as a shorthand method, that is fine, just be aware you're assuming that the actual amount paid in capex is the same as the accounting charge in the P&L, and that may or may not be the case for a lot of reasons. In Jumbo's case amort both years was $8 to $8.5m.

The cash flow statement of Jumbo is:

I'd look at Capex in 2021 as Payments for PP&E plus Payment for TLC extension fee plus Payment for other intangibles - $21.5m. I'd put 2022 capex at $6m using a similar calculation. A word of caution, if I was looking at FCF I'd also look at the breakup of the lease liabilities in the financing activities - that may also need to be included...

It's definitely not a stupid question @Rocket6 - as my old boss used to say there are no stupid questions. Questions are by their nature neutral - it's the people asking them that are stupid! He was joking...I think...

I would typically take capex (investing cashflows) from operating cashflow to get FCF. Although, I'd like to get a read on the split between maintenance and growth capex. In some industries that's easier than others, but if you can identify it I would generally not factor in growth capex (as long as it truly was growth capex and not something that will need to recur to keep the lights on). Actual capex spend can be lumpy from year to year so I typically will look at it over an extended timeframe to get a normalised view. Alternatively you can use depreciation and amortisation, as it should be less lumpy, but I wouldn't use both as that's likely doubling up.

The renewal cost for The Lottery Corp is a difficult one. In a way it's similar to growth capex, although with in the long term it's something that is likely to need renewal so it may come down to your timeframe.

The bit that often gets missed since they changed accounting standards is lease payments (financing cashflows). To me that's a real ongoing cost and should be factored into FCF.

So in summary I think FCF is:

Operating cash (adjusted for one offs) less Maintenance capex (per investing cashflows) less Lease payments (per finance cashflows)

Hi @Noddy74 I include capex (growth and sustenance) in the calculation of FCF. This is because FCF refers to CF which is available to pay lendors and shareholders. So, companies that are investing for growth have to allocate capital in a way which maximises value, and the capital allocation decision is about how to deploy the OperatingCF - invest, pay debt or return to shareholders. For me FCF is the key measure as I want to see what is left after the company has continued to invest to drive future growth. I’m not that keen on a FCF that is achieved without ongoing investing, because that raises questions about sustainability.

I agree with your point about including lease payments as an operating cost.

According to Investopedia.com, FCFF (free cash flow to the firm), does not include investing capex. I’d never used FCFF before looking it up just now.

You're probably right @mikebrisy I was a bit too adamant about excluding growth capex from FCF. If I'm doing a DCF then I won't make the distinction - partly because it's too hard and would rely on subjectivity from me or the company i.e. the split isn't audited. But more importantly because the DCF assumes growth and in part that's because of the growth capex spend. However, if I get to the point of really liking a company enough to do a deep dive then the split does become more important to me. I want to get an idea of what they need to spend to keep the lights on versus what's discretionary because I view growth capex as something that doesn't need to be capex, it could be dividends to shareholders or buybacks etc. I see it as them choosing to spend as growth capex because that's how they're going to get the best return and I can measure if they're right over the long term through ROIC or ROE. Whereas they can't do the same with maintenance/sustaining capex - at least not is the medium to long term.

But I should of equivicated a bit more because it's not cut and dried and when I do make the distinction it's a bit more qualitative than quantitative. Sometimes I might give a high level valuation based off multiples e.g. my model says they might deliver x FCF next year and I think the market might pay y times for that. If I do that and I'm excluding growth capex I'll call it out so you can add back if you wish.

@Rocket6 @Mujo @rh8178 @Noddy74 @mikebrisy

This is what Brian McNiven says about ‘Owners Earnings’ and what to consider when using ‘Discounted Future Cash Flow’ as a valuation method (sorry about the quality):