How to value a CAPEX heavy company?

by a searcher

3 years ago

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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11 comments

investor from University of Rochester - William E. Simon Graduate School of Business

I would agree with the sentiment that you need to focus on free cash flow (that is after the maintenance cap ex). The question is how much of current spending is maintenance and has it been adequate?Additionally, there may be a point where replacement is required and that heavy/lumpy spending will do a number on your IRR calculations.While I agree multiples are important, there is a serious qualitative judgement at play here as well — is it reasonable to expect a given level of maintenance spending is going to allow the asset to continue performing at historical levels?Do yourself a favor and pay attention to the health of that heavy asset base.

3 years ago | like reply | 0 likes

searcher

Most business typically has some form of ongoing annual maintenance capex and growth. Typically for heavy manufacturing type businesses people will look at an EBITDA - M. Capex multiple to guide their valuation if the maintenance capex is relatively high. Growth capex should not be deducted due to 1) it is discretionary in nature and can be shut off and 2) it is an investment in the business to drive future EBITDA growth.

3 years ago | like reply | 0 likes

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