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If we look at the cash flow elements in Airea’s (LSE:AIEA) annual reports we find that in arriving at operating profit the company has annual deduction for depreciation of between £0.83m and £1.163m. This is largely a legacy of being a much bigger company with plenty of fixed assets (it was called Sirdar).
The depreciation figure must be compared with the actual outflow on capital items to gain an impression of the difference between profit numbers and owner earnings numbers. In 2015 fixed capital item expenditure was £0.459m and in 2016 it was £0.704m.
Proxy for owner earnings
(These are only proxies because I’m using historical amounts actually spent on changes in working capital and fixed capital items rather than the future focused “required expenditure needed to main the firm’s economic franchise, unit volume and invest in value-generating projects”).
| £’000s | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 |
| Profit after interest and tax deduction, but before exceptionals deduction | 1,248 | 695 | 416 | 78 | 341 | 378 |
| Add back depreciation (because it is not a cash flow) | +837 | +830 | +880 | +1072 | +1085 | +1163 |
| Deduct additional cash being tied up in working capital from year to year (a positive number indicates cash released) | +1,009 | -490 | -1633 | +416 | -940 | -413 |
| Deduct additional cash tied up in fixed capital items (purchases have a negative effect, sales of PP&E a positive effect) | -704 | -459 | +157 | -132 | +2,417 | -455 |
| Pension contribution | -400 | -400 | -375 | -417 | -550 | -600 |
| Proxy owner earnings | 1990 | 176 | -555 | 1017 | 2353 | 73 |
| Proxy owner earnings if we ignore working capital changes (they’re volatile and would probably not change for a company with declining revenue) | +981 | +666 | +1078 | +601 | +3293 | +486 |
Looking at the row of numbers along the bottom I conclude that owner earnings have fluctuated but cannot say with any certainty that they are either (a) averaging more……..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
