Negative unlevered free cash flow
Hi there, I have just started with a corporate finance course and try to interpret some Cash Flows. Could you tell me what a negative value of an unlevered free cashflow mean for a claimant of a firm? Thanks in advance!!
The company has not generated enough cash from operations to pay the claim
EBITDA Strong But Unlevered FCF Deeply Negative (Case Study Interview Coming Up!) (Originally Posted: 09/22/2015)
What's up monkeys. I have an interview coming up and the fund has asked me to evaluate a manufacturing company. The problem is that the company is changing its business model from manufacturing machinery and selling it, to keeping the machinery on balance sheet and leasing it out. Because of this, there is major Capex required to keep the machines themselves, and Unlevered FCF in my DCF is deeply negative. EBITDA, which excludes Capex and interest, is very strong because the company is doing well. Applying a multiple to EBITDA gives me a massive valuation, but the DCF valuation is super low.
How do I think about the valuation/DCF here? Help would be greatly appreciated my interview is in two days!
Try using a EV / (EBITDA - CapEx) multiple
Agree with @CMoore0520, but to specify use maintenance capex or you could use EV/EBIT as the Company will be depreciating the assets that it has chosen to keep on the balance sheet.
Also, does the Company sell it's equipment at a certain age? I've seen businesses that do that and you would want to incorporate equipment sales as well. Maybe a longer term modelling approach.
Are there contracts for the leases? If so, then there are asset-based securitization facilities (e.g., Equipment Lease-Backed Notes). The ability for the business to raise debt could provide you the floor for valuation.
So, its becoming a leasing biz. Be creative & come up with alternative valuation methodologies.
I would likely use a multiple of EBITA (no D). This effectively amortizes the upfront investment over the life of the lease.
You should also look at ROI of the equipment under the lease structure.
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