Basic, lesson 1 of 3
The multiples research uses
P/E dominates research notes, EV/EBITDA handles leverage, and free cash flow yield keeps both honest. Each one pairs a price with the earnings that belong to the same investors.
9 min, 3 checks
1Equity value and enterprise value
Equity value belongs to shareholders. Enterprise value belongs to everyone with a claim on the operating business: shareholders, lenders, preferred holders, and minority owners of subsidiaries. The bridge adds the other claims and subtracts cash.
Worked example
Brennan Chemicals
- 1Price $40 x 100 million diluted shares: equity value 4,000
- 2Plus debt 1,500, minority interest 200, preferred 100; less cash 500
- 3Enterprise value: 4,000 + 1,500 + 200 + 100 - 500 = 5,300
- 4EBITDA 530: EV/EBITDA 10.0x. Net income 250, EPS $2.50: P/E 16.0x
Both multiples describe the same stock. EV/EBITDA compares it with peers carrying different debt; P/E is the number clients quote.
Check 1
Equity value is $2,000 million, debt $800 million, cash $300 million, minority interest $100 million. What is enterprise value, in millions of dollars?
2Match the numerator to the denominator
| Multiple | Price side | Earnings side | Used for |
|---|---|---|---|
| P/E | Equity value per share | EPS, after interest | Most stocks; the headline multiple |
| EV/EBITDA | Enterprise value | EBITDA, before interest | Leveraged or capital heavy companies |
| EV/Sales | Enterprise value | Revenue | Unprofitable or early stage growth |
| FCF yield | Free cash flow per share | Divided by price | Cash generative, mature companies |
| P/B or P/TBV | Equity value | Book or tangible book equity | Banks and insurers |
Check 2
Which multiple mixes claims and should not be used?
Check 3
Free cash flow per share is $3.00 and the stock is $50. What is the free cash flow yield, in percent?
Terms in this lesson: Price-to-earnings ratio, Enterprise value, EV/EBITDA multiple, EBITDA, Equity value, Net income.
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