Free Cash Flow

This weekend while doing some valuation work, I began to wonder about the free cash flow (FCF) calcuation, typically found as follows:

FCF = operating cash flow (OCF) - capital expenditures

My question: What exactly should be included in capex? In addition to the capital expeditures line item, which nearly always appears as the first item in Cash from Investing Activities directly underneath OCF, aren't other line items, such as 'acquisitions,' also capex?

By ignoring acquisitions, we would significantly over-estimate FCF for acquisitive companies like Johnson and Johnson (JNJ).

After some research and thought, however, the answer to this question is 'no.' While acquisitions are certainly a form of capex, they should typically not be included in FCF calcuation. The 'free' in FCF is supposed to denote the cash that is 'free' for deployment to shareholders after a company has laid out money to maintain and advance its current asset base. That money deployed toward a company's current asset base is what should be considered capex in FCF terms.

Acquistions nearly always involve procurement of new assets, which is one opportunity of many that FCF may be used for to enhance shareholder value (other opportunities might include new product development, issuing dividends, or paying down debt).

Thus, I have confidently concluded that I have not been miscalculating FCF all these years...

position in JNJ