Any business out there, no matter how big its competitive advantage may be, can't simply sit back and watch the money come in. To maintain that competitive advantage -- and hopefully grow the business -- you have to be willing to spend money. Potash Corp of Saskatchewan (NYSE:POT) may have a firm grasp on close to 20% of the world's potassium-based fertilizer thanks to its low-cost mines, but to keep those mines running smoothly, there needs to be some investments from time to time. Is the company spending enough to maintain its position, or perhaps even investing back into the business enough to grow beyond its current operations? Let's take a look at Potash Corp's spending habits over the past few years to see what the company is up to.
A better measure of growth: Adjusted net capital expenditures
There is the old adage that you need to spend money to make money, and this is especially true when it comes to a capital intensive industry such as agricultural fertilizers. These products generally involve mining or chemical manufacturing, and the equipment associated with these processes will get worn down and will eventually need to be replaced.
A general rule of thumb on how much a company's assets and equipment are wearing down is its total depreciation. If a company is spending money on capital expenditures above what it's depreciating, then generally that is considered capital spent for growth. The thing is, though, these aren't the only expenditures associated with growing and maintaining the business; there are also research and development expenses as well as money spent on acquisitions.
The total of all these factors is known as the adjusted net capital expense. If this number is in the black, then it's likely the company is spending to grow, while a negative number might suggest it's looking to horde cash.
Potash's spending habits
Potash is a business that doesn't exactly require much in terms of research and development. Mining techniques haven't changed that much in the past few decades, and the chemical processes for generating nitrogen- and phosphate-based fertilizers are pretty well established. So, it shouldn't be too surprising that Potash hasn't had any significant R&D Spending in the past five years. The real important numbers for Potash are going to be capital expenditures and acquisitions net of depreciation. Looking at the financial statements for Potash courtesy of S&P Capital IQ, here is what Potash's adjusted net capital expenses look like for the past five years.
As you can see, net capital expenditures have far outpaced any depreciation costs over this time. One thing about these numbers that might cause some raised eyebrows among investors is the sharp decline in capital expenditures after 2012. The reason for this is that Potash has been spending a very large amount over the past several years to bring a new potash mine online that will represent more than 30% of new global capacity between now and 2018. This mine is nearly complete, so the capital obligations are becoming less and less. By 2016, capital spending is estimated to be 75% less than in 2013.
What a Fool believes
Potash Corp of Saskatchewan has been investing quite heavily over the past several years, yet at the same time, the company has still been able to generate loads of free cash flow that management has used to increase its dividend as well as buy back a significant amount of shares to boost shareholder value.
Investors in the company should see these things as very promising signs for someone who hopes to buy and hold a position in this company for many years to come. Not only is management willing to spend the big dollars when necessary to grow the business, but it still generates strong profits and free cash flow in the process. What more could you ask for from a long-term investment?
The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.