Ebitda Capex Explained: From Calculation to Business Value

Ebitda capex is a crucial metric for businesses, as it helps investors and analysts understand a company's ability to generate cash flow and invest in its growth.

Ebitda stands for earnings before interest, taxes, depreciation, and amortization, which means it's a measure of a company's profitability before accounting for non-cash items.

A company's ebitda capex ratio is calculated by dividing its capital expenditures by its ebitda. This ratio gives insight into a company's ability to invest in its growth while maintaining its profitability.

A low ebitda capex ratio might indicate that a company is struggling to generate cash flow, while a high ratio could suggest that it's investing heavily in its growth.

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EBITDA capex is the amount of capital expenditures (CAPEX) a business incurs relative to its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's a crucial metric for understanding a company's financial health and valuation.

A high CAPEX to EBITDA ratio can indicate that a business is investing heavily in new equipment or assets, which may not necessarily translate to increased revenue. This is evident in the case of a CNC machine manufacturing business where 20% of revenue was spent on CAPEX for the last 3 years, essentially wiping out the profit.

This high CAPEX to EBITDA ratio can also be a sign of tax purposes, as seen in the business in question, where the investment did not lead to significant revenue growth. The business owner's goal was to add capacity and upgrade aging equipment.

A more sustainable CAPEX to EBITDA ratio is typically around 5-6% of revenue, as seen in the searcher's estimates. This is a more reasonable investment level that can still cover debt service at a reasonable debt service coverage ratio (DSCR).

By adjusting EBITDA for CAPEX, you can get a more accurate picture of a business's true profitability. The searcher estimates that if they plan for 5-6% CAPEX investment, they should value the business on 15% approximate adjusted EBITDA.

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Calculating FCF involves understanding different types of Free Cash Flow, such as Unlevered Free Cash Flow (FCFF) and Levered Free Cash Flow (FCFE). FCFE is closer to normal FCF, but FCFF is capital structure-neutral.

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To calculate FCFF, you can use the formula FCFF = EBITDA – Taxes Excluding Impact of Interest +/- Other Non-Cash Adjustments +/- Change in Working Capital – CapEx. This means you need to deduct D&A, but not Net Interest Expense, to calculate Taxes.

For example, BMC Stock Holdings, a building materials company, can be used to illustrate the calculations for FCFF. The company's FCFF can be calculated by using the formula FCFF = EBITDA – EBIT * Tax Rate +/- Other Non-Cash Adjustments +/- Change in Working Capital – CapEx.

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There are two main types of Free Cash Flow: Unlevered Free Cash Flow (UFCF) and Levered Free Cash Flow (LFCF).

UFCF is also known as Free Cash Flow to Firm. It's a capital structure-neutral metric, meaning the company should pay the same amount of taxes regardless of its debt.

To calculate UFCF, you can use the formula: UFCF = EBITDA - CAPEX - change in working capital - taxes.

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FCFE, on the other hand, is calculated by adding Debt Issuances and subtracting Debt Repayments from FCF.

For BMC Stock Holdings, a building materials company, the examples show how to calculate FCFE and FCFF, but real life is indeed more complicated.

The formula for FCFE is: FCFE = EBITDA – Net Interest Expense – Taxes +/- Other Non-Cash Adjustments +/- Change in Working Capital – CapEx + Debt Issuances – Debt Repayments.

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FCF vs. Free Cash Flow is a common point of confusion for many investors. FCF stands for Funds From Operations, which is a key metric in real estate investing.

Free Cash Flow, on the other hand, is a broader term that refers to the cash generated by a company's operations after accounting for capital expenditures. FCF is often used interchangeably with Free Cash Flow, but they're not exactly the same thing.

In the context of real estate investing, FCF is a more specific metric that focuses on the cash generated by a property's operations, such as rental income and property management fees. This is in contrast to Free Cash Flow, which considers the entire company's operations, including non-real estate related activities.

On a similar theme: What Is Capex in Real Estate

To illustrate the difference, let's consider an example from the article section "Calculating FCF". A real estate investment trust (REIT) may have a high Free Cash Flow due to its diversified portfolio of properties, but its FCF might be lower if the properties are not generating enough cash from operations.

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CAPEX can wipe out a business's profit, as seen in a manufacturing business where 20% of revenue was spent on CAPEX for the last 3 years, essentially equaling adjusted EBITDA. This was done to add capacity and upgrade aging equipment, but the revenue didn't increase significantly.

The useful life of CNC machines can be 20+ years if well maintained, and most of the remaining machines in the business were less than 10 years old. This suggests that the business may have over-invested in CAPEX.

A 5-6% CAPEX investment on a go-forward basis is a reasonable estimate, which would lower the EBITDA by 5% of revenue. This is a key consideration when valuing a business.

You should value the business on an approximate 15% adjusted EBITDA, which is 20% adjusted EBITDA minus 5% CAPEX. This is a more accurate representation of the business's true profitability.

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The unlevered free cash flow formula is a crucial tool for understanding a company's financial health. It's calculated by subtracting capital expenditures, change in working capital, and taxes from earnings before interest, tax, depreciation, and amortization (EBITDA).

The formula can be written as: UFCF = EBITDA - CAPEX - change in working capital - taxes. Let's break it down further:

In the example, a construction company's unlevered free cash flow was -$200,000 in the first year and $160,000 in the second year. The calculation for each year can be seen in the table, illustrating how the formula works in practice.

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The unlevered free cash flow formula is a straightforward calculation that helps you understand your business's financial health.

Unlevered free cash flow (UFCF) can be calculated using the following formula: EBITDA - CAPEX - change in working capital - taxes. This formula is a simplified version of the original formula: EBITDA - capital expenditures - working capital - taxes.

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To calculate UFCF, you'll need to know your earnings before interest, tax, depreciation, and amortization (EBITDA), capital expenditures (CAPEX), change in working capital, and taxes.

Here's a breakdown of the variables you'll need:

Let's look at an example to see how this formula works in practice.

Unlevered free cash flow is higher than levered free cash flow because it excludes debts.

The main difference between unlevered and levered free cash flow is that unlevered free cash flow doesn't account for borrowed capital, whereas levered free cash flow assumes a business has debts.

Levered free cash flow includes debts, making it a more realistic measure for businesses that rely on borrowed capital to operate.

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To calculate unlevered EBITDA capex, you need to subtract the capex from the EBITDA. For example, in the construction company example, the EBITDA for Year 1 was $150,000 and the capex was $275,000, resulting in a negative unlevered EBITDA of -$200,000.

The capex can be a significant portion of the EBITDA, as seen in the manufacturing business example where the seller spent 20% of revenue on capex for three years, essentially wiping out the profit.

A good rule of thumb is to limit capex investment to around 5-6% of revenue, as estimated by the searcher in the manufacturing business example.

Here's a breakdown of the capex and its relation to EBITDA in the construction company example:

As you can see, the capex can have a significant impact on the unlevered EBITDA, but it's not necessarily a negative implication about the business.