06. Where did the money the company earned go?

Falling cash is not automatically waste: equipment purchased today may work for years. Calling spending an investment does not establish that it earns a good return either. Follow Hanbit's equipment purchase of 40 through expense, cash flow, and the remaining asset. Amounts are KRW million.

Payment and expense occur on different schedules

Hanbit buys sales and administration equipment at the start of the year and immediately puts it into use. With an assumed five-year life, zero residual value, and straight-line depreciation, annual depreciation is 8 and ending carrying value is 32. In this distributor example depreciation is an administration expense; in other settings an asset's use can lead to inclusion in inventory cost.¹

Adding depreciation back in indirect operating cash flow reverses a noncash expense in that reconciliation. It does not make the equipment free. The payment of 40 remains in investing cash flow.²

Define free cash flow before calculating it

Using the simple definition operating cash flow − capital expenditure, Hanbit's FCF is −3.2 − 40 = −43.2. Operations and equipment purchases together reduce opening cash from 100 to 56.8. FCF has no single uniform definition, so inspect a company's adjustments before comparing it with peers.³

This measure is not the FCFF used in the later enterprise valuation. Our operating cash flow includes interest paid of 6. A cash flow for all capital providers must remove financing effects, deduct appropriate reinvestment, and use a matching discount rate. Substituting this simple FCF into an enterprise valuation without checking its scope would mix definitions.

For the same first year, simplified FCFF is EBIT × (1 − tax rate) + depreciation − capex − increase in working capital. Keeping the assumed 20% tax rate gives 42 × 0.8 + 8 − 40 − 40 = −38.4. This also equals simple FCF of −43.2 plus after-tax interest of 6 × 0.8 = 4.8. It remains a negative first-year cash flow; the stable FCFF of 10 in chapter nine is a separate future assumption.

Maintenance and growth spending require evidence

Excluding all 40 as growth investment makes the cash profile look easier. But without that equipment, current operations might not function. Distinguish spending needed to sustain the business from spending intended to expand it. If the company does not disclose the split, do not present an exact allocation as an established fact.

Consider a separate next-year scenario: net income remains 28.8, depreciation stays 8, and working capital does not increase. Operating cash flow becomes 36.8. If replacement investment is only 8, simple FCF is 28.8. If working capital instead rises by another 40 and equipment spending is again 40, FCF returns to −43.2.

The same profit can produce very different available cash. The favorable scenario is not an automatic forecast. If growing sales keep requiring more inventory and customer credit, assuming zero working capital investment needs justification. Read investment plans alongside collection patterns.

Keep a short record

Place equipment purchases, intangible asset spending, acquisitions, and lease-related payments next to operating cash flow. Identify which appear in the company's reported FCF. Then connect each major investment with its expected incremental cash and the date that cash should begin. “Cash fell because of investment” is only the start of the explanation.

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Footnotes

1. IFRS Foundation, IAS 16 Property, Plant and Equipment. Asset recognition, measurement, and depreciation; useful life and residual value here are assumptions. ↩

2. IFRS Foundation, IAS 7 Statement of Cash Flows. Noncash adjustments and cash flow classification. ↩

3. SEC, Non-GAAP Financial Measures. Question 102.07 addresses the absence of a uniform FCF definition. ↩