Freeport-McMoRan (FCX)

[eddy2]

The issue of a company buying back its own stock. When a company goes to the public market for capital that capital has been previously taxed. If you raise $1 in capital publicly you now receive an extra $.50 of tax rebate or good will. If that dollar of capital was to be paid back to its share holders the company would owe a $1.50 the share holder debt is still a $1.00.

So half of the share holders deficit owed is the paying back of the tax rebate.

So let’s say there was $1.50 of treasury owed and a $1 of share holders deficit how much of the treasury is contributed too the tax rebate that was issued on the $1 of capital raised. Well it’s $.50. You could take the $.50 and deduct it from the $1.50 and be left with a $1 of tax’s owed.

How much revenue was generated if there was a $1 of depreciation. Well all toll there was $2.00 worth of revenue. How much profit was generated. In this particular case zero yet there was a $1.50 in tax’s owed to the goverment.

Everyone can see the $.50 owed on the tax rebait but the head scratching is why the other $1 of tax’s.

This brings us to following the money over to the credit that was offered out “receivables”. You may be asking your self why then is there tax’s charged on something not yet received. The answer to that is the depreciation that is allowed to be taken off the revenue to obtain the profits.

Let’s take a moment and look at the charges you would charge your customer on your depreciated assets. The company just purchased a very expencive piece of equipment for a $1 that has a service live of ten years. The equipment can be depreciated 10% a year. The first year $.10 is depreciated. The second year 10% of $.90 is allowed so now it’s less then the previous year.

You wouldn’t charge your customer $.10 one year and five years down the road a lot less. You would equal the charges over the time period or service live of the machinery you purchased.

So in the beginning of the cycle there is a deficit and toward the end of the cycle you would have a positive cash flow.


This is of course if the numbers are being met.

Now comes the curve ball at you. The stock falls to where it’s below the projected future earnings. The company buys back the shares with money borrowed. This becomes now a double tax whammy to the company. Borrowed money is money that has been previously taxed and your now using that money to buy back shares that has a tax debt associated with the equity.

This brings us to the formula EBIDA and why this is crucial in validating a stocks value.

I hope this information helps others in understanding the complexity in the numbers. Don’t be fooled just cause there is treasury stock that it’s time to buy the stock. If the assets are under water relative to the liability depending if there is more credit then debt and who is holding the debt of the credit. If it’s the company holding the debt of the credit the share holders put up along with the tax rebate from the government then there is good debt and bad debt in the mix.

We will leave it there for now. Good luck.