Free Cash Flow Multiples in IPO Valuation
I am trying to understand FCF based multiples and IPO valuations. If a company has a sizable amount of leverage I imagine investors / research analysts would look at levered FCF rather than unlevered FCF. I believe EV/FCF multiples have to use unlevered FCF as Enterprise Value is a capital structure agnostic metric and the FCF metric would need to be unlevered as well.
The area I am getting confused on is that I looked through a handful of research reports that used Ev/FCF valuation, where they calc FCF starting with net income, walking down to cash from operations (CFO) and then taking out capex. Isn't net income a levered number, such that you couldn't use that FCF metric in an EV/FCF multiple? (to clarify, at no point in getting from NI to CFO did they add back the interest expenses).
Any thoughts? Am I missing something here? The reports I looked at had some leverage (i.e. they weren't no leverage businesses)
From my understanding, they are calculating those multiples wrong too. Net income is a leveraged number. Should be an easy fix to adjust levered to unlevered FCF if the companies are publicly traded. Calculate the tax rate and apply that to EBIT to get Nopat for unlevered FCF
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