This next factor is similar to the R&D calculation and seeks to uncover the same kind of information - how much is the company investing in staying competitive?

Capital expenditures have the potential of making the company more productive and so we consider it a good thing when these are greater than the industry average. Another reason is that investment in capital items can indicate management confidence in future earnings.

I'm going to use the capital expenditures line item from the cash flow statement. I think it is a nice, tidy alternative to figuring out the numbers from the balance sheet and getting involved in the non-cash, highly subjective area of amortization.

For those of you not familiar with cash flow statements, a negative number demonstrates cash out of the company, whereas a positive number indicates cash into the company. This number should usually be negative; if it was positive it would indicate that the company was liquifying its assets.

Here is what we need to do:

- Create an
**analysis template**in Verdasis with two data columns: Capital Expenditure, Y and Capital Expenditures, Y-1. - In the
**portfolios**section, apply the analysis template to the "US Oil & Gas, Integrated" portfolio by clicking the "**Analyze**" button beside that portfolio in the left hand menu bar. - Export to Google Docs or Excel.
- On the spreadsheet I calculate the industry average for both Y and Y-1 at the bottom of those two columns. I use the following formula:
- I calculate the industry growth (or decline) with this formula:
- I repeat the above growth/decline formula for each company,
- I take the difference between the company's growth and the industry average with this formula:
- Finally, each value gets a rating. If the number is positive, they get a "1", if expenditures are less than the industry average they get a "-1". I use this formula:

To see the spreadsheet Click Here.

Thank you for reading! The next post will be on Gross Margin. A cliff hanger, I know, but you'll just have to wait until Thursday, May 3, 2012 to find out what happens next.

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