Operating free cash flow
Sector Deep DivesEBITDA less capital expenditure, the standard sector measure of what a capital intensive business actually generates.
Also written: OpFCF, EBITDA less capex, EBITDA minus capex
Operating free cash flow strips the one thing EBITDA most conspicuously ignores. It is measured before tax, interest and working capital, so it is not free cash flow to the firm, but it puts businesses with very different capital needs on a comparable footing.
It is the working measure in telecom, towers and cable for that reason. An EBITDA margin in a network business describes the operating cost structure and says nothing about the reinvestment required to keep the network competitive, and the gap between the two is not small.
The definitional questions are worth settling before you quote it. Whether spectrum payments are inside capital expenditure, whether lease payments are deducted given that IFRS 16 moved them below EBITDA, and whether growth capital expenditure is separated from maintenance, all change the answer materially.
Used as a multiple it exposes what EV/EBITDA hides. Two companies on the same EV/EBITDA can be on wildly different multiples of operating free cash flow, and it is the second number that corresponds to anything an owner receives.
Worked example
Illustrative: NetCo has EBITDA of 380 and capital expenditure of 250, so operating free cash flow is 130. SoftCo has EBITDA of 200 and capital expenditure of 30, so 170.
Price both at 7.0 times EBITDA and the enterprise values are 2,660 and 1,400.
On operating free cash flow that is 20.5 times for NetCo and 8.2 times for SoftCo. The same headline multiple, and a very different price for the cash.