okay, i have a general questions about multiples. when do you use historical values and when do you use projections?
For example, if I wanted to calculate EV/EBITDA, Do I use the current EV but use projected EBITDA? Shouldn't it be current divided by current for the current multiple and projected/projected for the projected multiple?
I'm just confused because the BIWS video uses the current EV but uses historical/projected EBITDA for historical/projected multiples...
So when someone says so-and-so stock is currently trading at 10x EBITDA, which EV and EBITDA is it using? current, historical, projected?
I would really appreciate the helppp!!
Thanks in advance!
Depending on the company's filing patterns (i.e. if it files Q's or not), I interpret "Trading at X times EBITDA" as current EV to LTM/LFY EBITDA. If it is projected ("trading at x times projected EBITDA"), I also assume it's not projected EV (projecting a share count/intent to issue new debt could be problematic for some firms) to NTM or some future fiscal year's projected EBITDA.
This comes from how I was taught in my SA, but I could definitely be way off base here. Hope this helps.
^ that seems generally correct.
There's more than one way to do the multiples, depending on the firm you're valuing and what exactly you're trying to look at. There's a classic UBS primer that explains it a bit, I'll try to find it for you.
EDIT: here - http://macabacus.com/docs/valuation-multiples-primer.pdf
The EV that you use is ALWAYS current EV. There is no such thing as "projected EV." The whole idea behind comparing multiples is to evaluate how the markets are valuing a company today, so the metric for value (EV) should always be current.
I recently answered the question of whether you should use forward or historical multiples here: //www.wallstreetoasis.com/forums/ltm-ntm-and-forward-multiples
The most important thing about selecting a measure of income (NTM EBITDA, LTM EBITDA, etc.) is that you use a consistent metric between the companies you are comparing, so don't compare one company's multiple on next year's EBITDA to another company's multiple on last year's EBITDA.
The EV that you use is ALWAYS current EV. There is no such thing as "projected EV." The whole idea behind comparing multiples is to evaluate how the markets are valuing a company today, so the metric for value (EV) should always be current.
I recently answered the question of whether you should use forward or historical multiples here: //www.wallstreetoasis.com/forums/ltm-ntm-and-forward-multiples
The most important thing about selecting a measure of income (NTM EBITDA, LTM EBITDA, etc.) is that you use a consistent metric between the companies you are comparing, so don't compare one company's multiple on next year's EBITDA to another company's multiple on last year's EBITDA.
The way I was taught was that EV should always be today and with earnings one or two years forward. Why? Because in finance, you want a forward looking multiple which is based on forward earnings. In other words, how is company X trading based on the market's consensus earnings for the following year? How does this multiple compare against its peers?
LTM or trailing earnings are less relevant (because it is a historical figure) unless there is no broker coverage.
LTM is an accurate measure of what has happened though, whereas using forward earnings uses quite a bit of guesswork that often ends up inaccurate.
Well forward earnings should be consensus, therefore it is a good indication of future expected returns. Remember that the share price and thus EV is a reflection of investors' views of future earnings, not a reflection on past earnings. Think time value of money. Yes, I agree that no consensus forward is accurate, however it is a reflection at that point in time of the what investors and brokers view the company at hand will earn in the next year.
LTM earnings are used, however I have found them to give non-sensical multiples (e.g. generally too high, as the market is looking at next year's earnings). There is also some distortion in using LTM especially during volatile periods where share prices fluctuate, such as the period that we're currently in, which further exacerbates the problem. Therefore more weighting should always be given to forward multiples.
If you wish to work out consensus forecasts from first principles as opposed to using a database such as capitaliq, the idea would be to collate all the broker earnings from a large-ish sample of brokers and take a median or average. Of course you'll have to check for consistency of earnings before you do this.
Hope this helps.
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