Basic, lesson 1 of 4
Which multiple, and why
Every multiple is a shortcut for a cash flow. Pick the one whose denominator is closest to the cash the business really produces, and use it the same way across peers.
8 min, 2 checks
1The common multiples
| Multiple | Good for | Misleads when |
|---|---|---|
| P/E | Steady earners with normal leverage: consumer staples, many industrials | Leverage differs a lot, or earnings carry one time items |
| EV/EBITDA | Comparing companies with different debt loads | Capex or leases differ, since EBITDA ignores both |
| EV/EBIT | Capital heavy businesses where depreciation is a real cost | Acquired intangible amortization distorts EBIT |
| FCF yield | Mature businesses with stable capex | Working capital swings in a single year |
| P/TBV | Banks and insurers, where the balance sheet is the business | Book value is stale or full of intangibles |
| EV/Sales | Unprofitable or early growth companies | Margins will differ a lot at maturity |
2EBITDA versus EBITDA minus capex
EBITDA treats a pipeline and a software company the same, but one has to keep spending to stay in business. Subtracting maintenance capex, or using EBIT, shows the cash that is actually left.
Worked example
Two made-up companies
- 1Ashby Logistics: EV $1,000m, EBITDA $100m, capex $10m. 10.0x EBITDA, 1,000 / 90 = 11.1x EBITDA minus capex.
- 2Brant Shipping: EV $800m, EBITDA $100m, capex $40m. 8.0x EBITDA, 800 / 60 = 13.3x EBITDA minus capex.
Brant looks cheaper on EBITDA and is more expensive on the cash it keeps.
Check 1
EV is $1,500m, EBITDA $200m, and capex $50m. What is EV / (EBITDA - capex)? One decimal.
Check 2
Which multiple would you lead with for a regional bank?
Terms in this lesson: Price-to-earnings ratio, Carried interest, Enterprise value, EV/EBITDA multiple, EBITDA, Capital expenditures, Operating income, Depreciation, Amortization, Balance sheet.
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