Free Cash Flow, CapEx, and ROE in Public Contracting: A Scorecard for Owners Who Think EBITDA Is Cash

EBITDA Is Not Cash

Every contractor I've worked with knows their revenue. Most know their gross margin. Some know their EBITDA.

Almost none know their free cash flow.

EBITDA — earnings before interest, taxes, depreciation, and amortization — is the metric PE firms use to value your business. But it's not what they underwrite. What they actually model is free cash flow: the cash your business generates after paying for everything, including the trucks, tools, and equipment you need to keep operating.

The gap between EBITDA and free cash flow is where a lot of contractor owners get surprised during diligence.

The Public Company Scorecard

Here's how the five largest publicly traded specialty contractors perform on the metrics that matter beyond EBITDA margin:

Sources: FY2025 10-K filings and earnings releases. FCF = Operating Cash Flow minus Capital Expenditures.

Free Cash Flow: The Real Measure of Financial Health

Comfort Systems generated $1.03B in free cash flow on $9.1B in revenue — an 11.3% FCF margin. That means for every dollar of revenue, 11.3 cents ended up as actual cash the business could use for acquisitions, dividends, or debt repayment.

The range across the group is 6.5% to 11.3%. That's the benchmark.

Why FCF matters more than EBITDA:

EBITDA ignores three things that consume real cash:

1. Capital expenditures — trucks, equipment, tools, office buildouts
2. Working capital changes — cash tied up in AR, inventory, prepaid expenses
3. Taxes — which you definitely pay

A contractor with 15% EBITDA margin but 5% capex intensity and a growing AR balance might have 3–4% FCF margin. That's a business that looks profitable on paper but can't fund its own growth.

Capital Intensity: How Light These Businesses Run

The most striking number in this dataset is capex as a percentage of revenue:

These are extraordinarily capital-light businesses. Limbach spends $3.8M in capex on $647M in revenue. EMCOR spends $113M on $17B.

What this means for private contractors:

If your capex is 5%+ of revenue, you're either in a fundamentally different business (heavy equipment, fleet-intensive) or you're over-capitalizing. The most common version: buying new trucks before the backlog justifies it, or building out a shop that's twice the size you need.

PE firms model capex as a percentage of revenue when they project future cash flows. If your historical capex is 5% and the industry runs at 1–2%, they'll either assume you've been under-investing (and add future capex to their model) or that you've been over-spending (and discount accordingly).

Return on Equity: What Your Capital Actually Earns

ROE measures how efficiently owner capital generates profit. It's the answer to: "For every dollar I have invested in this business, how much am I earning?"

Comfort Systems generates 41.8% ROE — for every dollar of equity, they earn 42 cents. That's exceptional by any standard.

APi Group's 8.9% ROE is lower because they carry $2.8B in debt from acquisitions, which inflates their total capital base. Their equity is high because of goodwill and intangibles from 500+ acquisitions.

For private contractors: Most owner-operators can't cleanly calculate ROE because they blend personal and business equity. But the concept matters — especially during PE diligence. If you have $2M in equity and your business generates $200K in net income, that's 10% ROE. PE will benchmark that against 20–42% at public comps and ask why.

The answer is usually: you're paying yourself a below-market salary, your spouse is on payroll, and you haven't taken a distribution in three years because the cash is always tight. PE normalizes all of that.

SG&A: The Overhead Question

SG&A (selling, general, and administrative expenses) as a percentage of revenue varies dramatically across this group:

• Comfort Systems: 9.7% — extreme scale efficiency at $9.1B
• EMCOR: 10.1% — similar scale leverage at $17B
• IES Holdings: 14.1% — moderate overhead with diversified segments
• Limbach: 16.9% — mid-cap overhead on $647M revenue
• APi Group: 24.4% — heavy inspection/monitoring infrastructure

The Level Index shows private contractor overhead ranges of 15–35% depending on size:

• Under $3M revenue: 25–35% overhead
• $3–10M: 20–28%
• $10M+: 15–22%

If you're a $10M contractor running 25% overhead, you're within range. But public contractors at similar revenue levels (Limbach at $647M) run 17%. The gap is where PE sees opportunity — and where they'll cut after acquisition.

The Balance Sheet: Debt and Cash

Comfort Systems and IES Holdings carry net cash positions — they have more cash than debt. That's unusual for companies this acquisitive and reflects strong FCF generation.

APi Group carries $2.8B in debt, mostly from acquisition financing. At 1.8x net debt / EBITDA, that's manageable but explains their lower ROE.

For private contractors: Most PE-backed acquisitions are financed with 3–4x debt / EBITDA. If your business generates $1M in EBITDA, the buyer will likely put $3–4M in debt on it. Your FCF needs to service that debt — which is why PE cares about FCF, not EBITDA.

What to Do With This

Know your FCF: Revenue minus all expenses minus capex minus working capital changes minus taxes. If you don't know this number, you don't know your financial health.

Benchmark your capex: If you're spending more than 2–3% of revenue on capex, understand why. Is it growth investment or maintenance? PE will ask.

Calculate your cash conversion: EBITDA margin minus FCF margin = the "leakage" between profit and cash. Public contractors lose 3–7 percentage points between EBITDA and FCF. If yours is 10+, you have a working capital or capex problem.

Track ROE: Even a rough calculation (net income / owner's equity) tells you whether your capital is working. If it's below 15%, you might earn more in an index fund — and PE will notice.

The full operating benchmarks for all five public contractors are in the Level Market Monitor, updated quarterly from SEC filings.

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FAQ

Q: What's a good FCF margin for a private contractor?

Public contractors run 6.5–11.3%. A well-run private contractor should target 5–10% FCF margin. Below 3% means you're not generating enough cash to fund growth, service debt, or build a cushion for downturns.

Q: Why does capex matter for my valuation?

Because PE models future cash flows, not past profits. If your business requires $500K in annual capex to maintain operations, that's $500K less in free cash flow — and $500K less in value at any given multiple.

Q: What's the difference between EBITDA and free cash flow?

EBITDA = Revenue – COGS – SG&A (before interest, taxes, depreciation, amortization). FCF = Operating Cash Flow – Capital Expenditures. The gap is driven by working capital changes (AR, AP, inventory), capex, and taxes. EBITDA is always higher than FCF.

Q: How do I improve my free cash flow?

Three levers: (1) Collect faster — reduce DSO by invoicing sooner and enforcing payment terms. (2) Spend smarter on capex — buy used equipment, lease instead of buy, time purchases to match backlog. (3) Manage working capital — don't let AR grow faster than revenue, negotiate better payment terms with suppliers.