P/E VS EV/EBITDA
Under what circumstance will a company has high P/E but low EV/EBITDA or vice versa?
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By the nature of how net income margins usually compare to EBITDA margins and how much net debt companies usually have, usually P/E ratios are higher than EV/EBITDA ratios just from empirical data and mathematics. But I suppose you're looking for a different answer.
A company with lots of leverage may have higher P/E than EV/EBITDA, but it is not certain. Why?
Capital structure independence. Remember that EV does not change based on how much debt you have (equity value will resize to accommodate a larger chunk of debt) unless the incremental debt implies incremental operating asset base. EBITDA is before interest expenses as well as D&A. So no matter how much you change up financing in this company's capital structure, the EV/EBITDA will remain the same (EV and EBITDA both do not change).
Meanwhile, earnings takes into account amount of leverage you have: more leverage -> more interest expense -> lower earnings (E).
The P (market cap) portion will also go down as you apply more leverage so it is uncertain what the net effect is (depends on whether EPS falls more than share price).
But yes, you may see situations where price falls less than earnings does, therefore resulting in a P/E that is much higher than EV/EBITDA as leverage increases.
Yes ppl come here and talk about the Muller theorem but don’t seem to acknowledge that Milken considerably debated muller on this and so one can’t reasonably argue that capital structure doesn’t matter. Two simple arguments that I can make: one your WACC (cost of capital) definitely changes and number 2) your capacity to invest in growth capex changes as more of your funds go towards interest payments.
mkt cap 200
net income 10
pe 20
Market cap 200
Debt 0
Cash 100
Ev: 100
Ebitda 15
6.67
Frankly your questions are pissing me off mate. You are an analyst and don’t know this much?
lol he's not asking you to make up arbitrary numbers, he's asking for some conceptual explanations
you're what.... an associate at some search fund probably?
Can you note figure it out on the basis of my example????? WHEN IT HAS HIGH CASH BALANCE
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