Question about Capex vs Working Capital
How should you view money spent on capex vs working capital? Capex can be seen as money that is needed to maintain operations (which is why PE firms favor businesses with low Capex). However, doesn’t working capital also show represent money that needs to be spent to maintain operations? Is capex seen as more long term and working capital seen as short term? Or does the difference between working capital and Capex really lie in what the money is being spent on (Capex being spent on buildings or factories and working capital being spent on things like inventory). If this is the case how does maintenance Capex differ from working capital (or do the two overlap/have similarities) Please correct me if anything I said was incorrect
Also curious.
Working Capital is factored into the LBO model as a current liability, which decreases depreciation expense net of tax after the deferred accretion base?
bump
If I had to choose, I'd rather a business with low maintenance capex and growing working capital vs. the opposite.
Putting aside growth capex, maintenance capex is essential to running the business, in many respects regardless of business performance.
Working capital is a little bit different because remember, we care about change in working cap. While I will prefer low or negative working capital businesses, if the business model is such that a certain portion of growth needs gets reinvested in working capital, I can live with it. If that growth starts to slow, change in working capital should also get lower in magnitude. If the business declines, working capital can reverse and decline, also providing a cash flow hedge.
So really should I be thinking about maintenance capex as money that is paid out for more fixed expenses and change in working capital is for more variable expenses (even though both are technically needed to maintain operations)?
Growth vs maintenance Maintenance capex is basically just lumpy opex that get capitalised. Needed to maintain what you have, so 0 incremental value to the business.
Growth capex are investments that are supposed to yield a return that you like. This is often why PE steps in: high funding needs for growth, with decent to great pay off (roll out of business model in new country, expansion of production capacity, etc).
Working capital If your business is flat, W/C should not be growing either. When we buy a business, we take a look at invoicing procedures, payables management, inventory levels, etc and see if we can optimise. When you can sustainably reduce working capital by $1 you create $1 value and can repay debt by $1/pay dividend of $1 etc.
If the business is growing, you prefer low WC businesses, as the EBITDA that comes from the growth will disappear in the working capital otherwise. This however is a one-off (if the sales plateau again, W/C delta can go back to 0), and is much preferred over high maintenance capex businesses.
Honestly, every single comment you post adds value / helps understanding. really appreciate it! Are you based in Europe or the US?
You’re welcome! Based in Europe
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