How to value a CAPEX heavy company?

searcher profile

January 06, 2022

by a searcher in San Francisco, CA, USA

I'm looking at a company with ongoing annual CAPEX and I'm wondering about the most realistic way of evaluating the business.

1. Valuation based on EBITDA
2. Valuation based on EBIT
3. Valuation based on (EBIT - Average Annual CAPEX)

So #1 above is more favorable for seller yielding highest valuation and I'm sure nobody here would favor that. My question is the realistic choice between #2 and #3 above in the current seller friendly market condition. #3 will yield the cheapest valuation but is #2 the more realistic option here? Not to add to the confusion but is something like (EBITDA - Average Annual CAPEX) also an option?

I'm trying to see which is not too burdening on the buyer and which also realistically gets the deal done in the current market.

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commentor profile
Reply by a searcher
from University of Dallas in Houston, TX, USA
The value of a business is all future streams of cash that can be taken out of it from now till judgment day. Key phrase here is taken out. So Free Cash Flow is what you want to focus on. For capex heavy business youd want to consider looking at earnings this way:
(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges … less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in (c). However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)

Your return on incremental invested capital should also be considered in the valuation picture - or are you buying an annuity?

The capex required to grow the biz is probably going to be a guess so you need to have a wider margin of safety in a capex heavy firm. Its just the nature of things.
commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
To answer the question, I just ran some numbers on my software (www.BVXpress.com) for a "typical" manufacturing business. The software "calculates" multiples. It runs complete buyer's pro-forma financials multiple times (IS, BS, CF, ROI, PV, IRR, etc.) under different combination of price and equity. It then extracts the maximum price that a buyer can afford to pay with minimum equity while being able to service the debt and achieve the targeted IRR.
Here is what I found:
V = 100 if CapX = 10% of EBITDA (Base Case).
V = 91 if CapX = 20% of EBITDA.
V = 82 if CapX = 30% of EBITDA
V = 74 if CapX = 40% of EBITDA
V = 65 if CapX = 65%
Many factors affect above numbers. A quick analysis showed sensitivity to a) depreciation life of the CapX and b) borrowing capacity of the new CapX,
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