If you've ever heard someone say that EBITDA is a 'Free Cash Flow Proxy', but weren't really sure what they meant, this video is for you. In this video, we lay out what EBITDA is and how it relates to the Free Cash Flow formula. Hope this is helpful! Let us know if you have any comments or questions!
Aiming for Investment Banking, Private Equity, or Investment Management Roles? Ramp up faster with our (free) Finance Analyst Starter Kit! - finance-able.com/analyst-starter-kit/ or check out our courses at courses.finance-able.com/
Hey there, EBITDA doesn't include deductions for Taxes and Reinvestment (CapEx + NWC). So UFCF is almost always LOWER than EBITDA. EBITDA is a metric that came around with the LBO boom in the 1980's and is much easier to calculate, which is why it's become much more common. Does that make sense?
@SamBakht Recorded a quick video for you here on Levered FCF: www.loom.com/share/c168df955508454489e68be2a8693f21?sid=1a16429c-c630-4826-9617-f400db99450e
Great question! When most people first learn this, they are told it's maintenance CapEx (i.e. what's required to maintain the business at low-growth/steady-state), but the more practical answer is that you project out CapEx that is intellectually consistent with your Revenue projections (which drive EBIT in your FCF calculation) until you get to a steady-state. In short, if you are valuing a business that has rapid revenue growth (e.g. Tech) you can't project CapEx as if the business were growing at GDP-like growth rates. That said, once you have projected out to steady state-growth (i.e. at the end of your Stage 1), you should be reflecting a lower, more maintenance level of spend (i.e. Capex = Depreciation), which is what you carry into maturity with your Terminal Value calculations.
Hey Vib, you’re working from Accounting Profit (EBIT) to the Cash generated by the Business (‘Free Cash Flow’). As you say, EBIT is before tax. So if we want to get to the Cash generated by the business, we need to deduct out Tax Payments as a Cash Outflow.
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If you've ever heard someone say that EBITDA is a 'Free Cash Flow Proxy', but weren't really sure what they meant, this video is for you. In this video, we lay out what EBITDA is and how it relates to the Free Cash Flow formula. Hope this is helpful! Let us know if you have any comments or questions!
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Aiming for Investment Banking, Private Equity, or Investment Management Roles? Ramp up faster with our (free) Finance Analyst Starter Kit! - finance-able.com/analyst-starter-kit/ or check out our courses at courses.finance-able.com/
Great great stuff. Thanks for the upload
Glad you found it helpful!
Great video. Why didn't you subtract interest as well?
I like it. Thank you.
Generally is UFCF higher than EBITDA? That's why EBITDA is safe for company valuation?
Hey there, EBITDA doesn't include deductions for Taxes and Reinvestment (CapEx + NWC). So UFCF is almost always LOWER than EBITDA. EBITDA is a metric that came around with the LBO boom in the 1980's and is much easier to calculate, which is why it's become much more common. Does that make sense?
what about levered fcf? can you do a video on that
@SamBakht Recorded a quick video for you here on Levered FCF: www.loom.com/share/c168df955508454489e68be2a8693f21?sid=1a16429c-c630-4826-9617-f400db99450e
Is that Capex only maintenance capex?
Great question!
When most people first learn this, they are told it's maintenance CapEx (i.e. what's required to maintain the business at low-growth/steady-state), but the more practical answer is that you project out CapEx that is intellectually consistent with your Revenue projections (which drive EBIT in your FCF calculation) until you get to a steady-state.
In short, if you are valuing a business that has rapid revenue growth (e.g. Tech) you can't project CapEx as if the business were growing at GDP-like growth rates.
That said, once you have projected out to steady state-growth (i.e. at the end of your Stage 1), you should be reflecting a lower, more maintenance level of spend (i.e. Capex = Depreciation), which is what you carry into maturity with your Terminal Value calculations.
@@FinanceableTraining Thanks Mike!
No problem! Let me know if you have any other questions.
Ebit is alredy excluding tax. So how can you remove tax from it? ie
"-Tax" in the free cash flow formula
Hey Vib, you’re working from Accounting Profit (EBIT) to the Cash generated by the Business (‘Free Cash Flow’). As you say, EBIT is before tax. So if we want to get to the Cash generated by the business, we need to deduct out Tax Payments as a Cash Outflow.