Question

Should the methods of cash flow analysis distinguish between a new capital intensive business and a more mature operation? Where is funding for pure research available?

Answer 1

Cash flow analysis for valuation purposes distinguish between a new capital intensive business and a more mature operation.



Differences:
1) Capital intensive business would require heavy capex spending in the initial years which would make the cash flow from investment(CFI) negative in the initial years. Whereas mature business would only require to maintain Capex to maintain depreciation expenses
2) New business are highly unlikely to be profitable in the initial years of oprations. Hence the CFO would aslo be negative. Where as mature businesses have a steady stream of cash inflows coming through, hence would most likely have positive CFO.
3) Cash flow from financing depends on the capital strucutre of the company can therefore can be either positive or negative.

Cash spent on research would be amortized in CFI. (As per IFRS)
As per U.S GAAP reserach should be immediately expensed in the income statment and should be treated as cash outflow.