What causes growth capex to go upside down? I'd think zero would be the floor. Thanks
Please read my original post for an explanation of the graph:
http://forums.wdwmagic.com/threads/a-spirited-perfect-ten.894588/page-402#post-6620382
Generally, capital expenditures fall into one of two categories: growth capex or maintenance capex. An expense generally is treated as capex (vs. opex) when its benefit lasts longer than a year. Changing your car's oil can be thought of as opex but replacing your car's tires can be thought of as capex. Both are forms of maintenance.
Conversely, installing a sunroof in a car is an improvement and can be thought of as growth capex.
Even though you don't buy new tires every year, a new car from a reliable auto manufacture will last a long time and is likely to require several sets of tires over its lifetime. If you did not replace the tires of your car as needed, your car would first become unsafe to drive and, eventually, undrivable once those treads wore thin enough.
The same is true with Disney's theme parks. Most of Disney's massive facilities are decades old and in need of regular long-term maintenance. Even WDW's "newest" theme park is approaching 20 years old. Older theme parks such as WDW require a tremendous amount of maintenance capex compared to original cost.
Furthermore, over these lifespans, inflation becomes a significant factor. For example, it's possible that replacing the roof of an attraction such as Peter Pan's Flight costs more in 2015 dollars than the entire attraction cost in 1971 dollars.
The point is, Disney needs to spend a lot just to keep its facilities from decaying.
On the plus side, inflation also helps tremendously with revenue. For example, in WDW's first year of operation (FY1972), P&R reported a whopping (
)
$97M in admission and attraction sales. With all the parks added plus inflation, P&R reported
$5.1B in 2014! In 1972, Disney's theme park depreciation was
8.5% of Parks & Resorts revenue. In 2014, that amount was
9.1%, remarkably similar.
Since Disney does not publically report growth vs. maintenance capex, one method to estimate maintenance capex is to assume that maintenance capex equals depreciation. Theoretically, if Disney does not spend at least the amount reported as depreciation on maintenance capex, the parks will decay.
Using depreciation as a measure, growth capex is the amount spent above depreciation. Thus, growth capex can be negative when depreciation exceeds capital expenditure.
