PP&E and intangibles forecasts.

Our assumptions for capex and depreciation amortization are critical assumptions in our model particularly for capital intensive businesses. Lets start with capex and purchases of intangibles. Given that companies need to invest to grow the business, we usually assume that there is a strong correlation between asset purchases and sales and therefore we usually forecast capex and intangible purchases as a percentage of sales. However, it isn't usually sufficient just to extrapolate historic investment relative to sales as businesses change over time. They go through investment waves or investment cycles. For example, if an e-commerce business discusses plans to invest in a new warehousing operation over the next two years. You would expect to see an uptick in capex to sales over the next two years as the capex will proceed the revenue increase. Therefore we should consider management guidance, investment plans based on the company strategy, and the investment levels of peer companies in our forecasts. One thing that can help us to monitor the extent to which asset purchases are replacing existing assets versus investing for growth is to split capex between maintenance capex and growth capex. Maintenance capex is prior year depreciation multiplied by 1 + the occurrence inflation rate. So it's effectively identifies the current cost of replacing assets as they depreciate. Whilst growth capex is the difference between total capex and maintenance capex. We can do exactly the same for purchases of intangibles. The next item to forecast is depreciation and amortization. Typically this is forecast as a percentage of opening net property plant and equipment and intangible balances. However, if we base this assumption on historic rates of depreciation and amortization, we're implicitly assuming that investment rates and asset lives are constant. If a company has an aging asset base then depreciation will increase relative to net property plant and equipment. Likewise if companies invest in assets with shorter lives, the depreciation will also increase relative to the net property plant and equipment balance. Therefore it's essential to flex this assumption if we expect changes in investment levels or asset mix. For example, if a retailer is investing heavily in warehouses rather than their store base and that these warehouses have shorter asset lives. Then we would need to adjust the depreciation rate upwards to reflect this. The final item to forecast is goodwill and brands both US GAAP and I have rest allow these to be held on the balance sheet without being amortized instead. They are subject to regular impairment reviews. Therefore we typically flatline goodwill and brands holding them constant in our model throughout our forecasts. The exception here is if we're modeling an acquisition or we expect the company to divest of the business related to the goodwill or the brand.