How Much Return Does Intel Generate On Its Capital Expenditures?

One of the most important metrics in analyzing a company’s operations is how efficient it is at reinvesting its earnings to generate future growth. Although it is incorrect to attribute the increase or decrease in income in a subsequent year entirely to the capital expenditure undertaken in the previous year, averaging out the change in income over an extended period can give us a good sense at how good a company is as a forward allocator of capital.

Over the last few years, Intel (NYSE:INTC) has managed to sustain the downward pressure on its profitability, arising from the declining PC sales. Further, the company has successfully managed to control its Capital Expenditure during this period to maximize its free cash flow. In 2015, the company cut down its capital expenditure for the year from an initial forecast of $10.5 billion at the start of the year to $7.3 billion at the year end. Furthermore, the company delayed the launch of its 10-nanometer Cannonlake processor to the second half of 2017. Despite these cost-cutting measures, Intel has maintained its dominant position in the PC and the data-center chip markets.

From the table below, we can clearly establish that Intel has been highly efficient in generating returns over its capital expenditure in the previous years.

However, adjusted capital expenditure, which includes the company’s R&D expense and the cash spent on acquisitions apart from the capital expenses, would give a better picture about a company’s efficiency in generating returns on investments. It should be noted that the company has been aggressively expanding its footprint into other adjacent markets such as IoT to offset the decline in its PC microprocessor business through acquisitions.

In the table below, we calculate Intel’s ROI based on the adjusted capital expenditure metric.

From the above table, we can conclude that Intel’s is efficient enough in reinvesting its earnings to generate future growth.

NOTE:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Intel

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