This was a question that came up for an ER interview at a BB. How can you arrive at a target price given EV/EBIDTA? What else do you need to know? Thanks!
how to calculate stock price from EV/EBITDA
In an interview or during an analysis if you are given an EV/EBITDA multiple it is fairly easy to get to an enterprise value and then an equity value. We walk through the process below.
With the EV/EBITDA multiple you can multiply by the company’s own EBITDA to find the enterprise value of the company. Then you can subtract the net debt of the company to find the equity value of the business. After that point you can divide by shares outstanding to find the equity value per share.
Read More About Valuation on WSO
- P/E Vs. EV/EBITDA - Advantages/Disadvantages?
- Why Does A Low EV/EBITDA Multiple Make A Good Acquisition Target?
- EV/EBITDA Vs EV/EBIT Vs EV/(EBITDA-Capex)?
Preparing for Investment Banking Interviews?
The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.
If you only have the multiplier, you need the actual EBITDA number. With that you can multiply out to the Enterprise Value then...
add Cash and Cash Equivalents subtract Debt subtract minority interest (if any, probably not relevant for interview) subtract preferred equity (if any, probably not relevant for interview) = Market Value of Equity
If you need a per share price, just divide your equity value by total shares outstanding.
get Investment Banking by Pearl and rosenbaum.
Is there a more intuitive way of looking at the relationship between the two? The calculation outlined by Tracer makes sense but it's rather mechanical.
how much simpler can it get? the ev/ebitda multiple and actual ebitda will tell you enterprise value. that minus net debt is the equity value which, divided by shares outstanding, will give you the share price of the company.
When you take the EV/EBITDA multiple and multiply it by the EBITDA figure, essentially it's saying "this is what the company is worth in terms of its cash-generating ability from its core business (i.e. assets in place, prospects, etc.)." The adjustments that Tracer has made reflect additional things that need to be considered -- adding in cash the company has, but adjusting downward for other claims on that cash flow.
Not sure if that's what you're asking or not, but figured it'd be worth a shot.
Tracer gave you the method.
I'll give a more detailed explanation that might be a bit more intuitive.
-You have what you consider an appropriate EV/EBITDA figure. We will say 6.0x for this example. -You have forecasted your financials out and see an 2012 EBITDA value of $100 in your model. -Multiplying the 6.0x and $100 gives you $6,000 EV (EBITDA terms cancel).
Now you know your EV for 2012 based on your estimates.
Taking your modeled figures you take the $6,000 and subtract out debt (say $1,000 according to the model for 2012) and interest ($100) and add back cash and cash equivalents ($300). This results in an equity value of $5,200.
Your model also has diluted shares forecasted (based on share repurchase guidance or estimated issuance). We will say we have 52M shares outstanding in our model for 2012.
5,200/52 = $100 share price. You can then compare this to the current price or whatever you need the valuation for.
That's how you take a 2012 EV/EBITDA and get a value from it. It's mechanical in the same way that all of this stuff is mechanical. The relationship is pretty basic: Enterprise Value is the entire value of the firm. EBITDA is the gross profit. So, it's showing you how much the firm is worth in relation to what it can generate minus cost of goods. The relationship to the stock price is basically the same but you need to whack out the debt and add in the cash to get at what the Stock Market actually pays for.
It's a good multiple since it is captial structure neutral - many industries have widely varying structures and this ends up being the preferred multiple method.
You need EBITDA, Net Debt and Total Shares Outstanding (TSO):
1) EV/EBITDA x EBITDA = Enterprise Value (EV)
2) EV - Net Debt = Equity Value
3) Equity Value / TSO = Target Price
edit: just realised I replied to a 2 year old thread..
I can send you a spreadsheet laying this out based on EV comps...PM if you'd like it.
@sigmahatsquared i'd love to get that too if possible. I don't have enough bananas to PM you.
PM'd you.
Target Price (Originally Posted: 03/05/2009)
Folks,
What methods do ER Analysts use to determine a Target Price of Stock (12 month target) I understand they do 5 year DCF to see the stock price now! but 1 year target price? how do they determine that ?
Whats the approach ? Do all Banks have the same approach?
predict growth rate of bottom line top line for 1 yr and thus share price?
maybe use a similar p/e ratio or multiple to the new higher predicted earnings to come up with a target price.
equity research reports
you cant look at your on competition to compute a target price?
is there anyway to forecast forward looking risk free rates and Beta for next years target price?
All ideas are welcome
come up with arbitrary target price and back into the P/E ratio to get it there
Looking at other ER reports is a bit true. You always look at Thompson to see if your target is in the ball park with your competitors and if it is not then you better come up with a very compelling reason why it isn't.
is how to get to the TARGET Price...
Im curious all ER and I bankers do it?
look at where you predict earnings to be, look at the comps/what kind of p/e multiples these companies have gotten in the past/where in the cycle you believe the companies are (trough vs peak, etc), and throw on a P/E ratio based on where you believe the company should be valued next to its peers (ie strongest in universe gets X P/E, middle of pack gets Y P/E, weakest gets Z P/E, etc). its more of an art than a science
precisely. remember when that joker henry blodget had a $400 12 mo target price for netscape? this was obv skewed BC there were a plethora of other tech stocks with wildly over-inflated p/e's but it jut goes to show you that the target price is largely arbitrary.
equity research reports = industry performance, growth rates, potential benefits/setbacks from change in regulation with new administration
LeggoMyGekko: I'm really impressed with your comments... always adding value! Why do you always have this need to sound intelligent? Go to bed Kid!
In many cases ER Target Prices "represent the price level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon."(From RBS Research)
Therefore the target price is not calculate one year out, it is calculated as of today and compared to the market price of today.
Target Price and Total Expected Return (Originally Posted: 11/03/2010)
I've often seen in sell side research that they mention that their recommendation methodology is based on a total expected return over the next twelve months, which includes capital gains + dividend yields.
For example lets say a stock that is trading at $4. The analyst values the company and arrives at a target price of $5. The analyst also estimates that the company will be give $0.5 in dividend next year.
Current Price: $4 Price Target: $5 Expected share price return (%): 25% Expected dividend yield (%): 12.5% Total Expected Return (%): 37.5%
I am just wondering how do they calculate their target price? My understanding is that any valuation based on FCFF or FCFE or P/E would provide a target price that includes dividend payments. Unless they make a clear assumption in their pro forma cash flows to deduct expected dividend payments, they would be double counting the dividend yield.
Dividend yields play no part of PT calculations. If you have an expected return (which legally you cannot I believe due to the wording), then your PT would be moving on a daily basis. Here's another way to think about it. The purpose of a price target is to place a value to a company's equity, right? The value of that equity, in theory, should not change on a daily basis for the purpose of what you, the analyst, think a company's worth.
Anyways, here's a couple of different ways we calculate PT. In my space, companies rarely pay dividends, but even in the event that they do, we ignore them for a PT calc.
Straight P/E: $1.00 in CY11E EPS with a 20x multiple gets you a $20 PT.
P/E (ex-cash): $1.00 CY11 EPS + $2.00 cash/shr with a 20x multiple gets you a $22 PT.
In essence, PT calculations are arbitrary. You have them to indicate a direction of where you think the stock is heading and also the magnitude of that direction. One last thing, all PT calculations must be justified using current group multiples or historical multiples and an explanation on why you think the company should trade at a discount, inline, or premium to those multiples. Hope that helps you out.
Accuracy of target price (Originally Posted: 12/30/2012)
I'm not sure if this is a stupid question or not, but I'll go on with it. So one of the purposes of issuing research reports is to influence investors' decisions on trading the underlying assets, and the target prices are predictions of the price movements in the future. Now assume that an analyst has made a perfect forecast on one stock's price, and every potential macroeconomic & market factors are captured by the report. Smelling something now? This is where the contradiction kicks in. If stock prices can be influenced by the issuance of research reports, then all research reports would never be accurate in their target prices because they do not capture the ex ante effect of how their reports might influence the market. If the hypothesis above is true, then I suspect a great concern to the reliability of research reports. And in the future, analysts might have to incorporate assessments of their credibility as a proxy to measure their report's materiality.
What do you guys think?
I am a newbie so don't know much but I am constantly learning. I came across the EMH recently which might answer this.
Efficient Market Hypothesis with 3 cases: weak, semi-strong, strong-form. The strong-form EMH suggests that the market instantly reflects even hidden information - but this clearly isn't true. So it all comes down to inefficiencies in the market, and how it cannot take into account all factors even if they are predicted accurately. Add to that the amount of information that is not publicly disclosed and then the many derivatives and "bets" which disrupt the EMH even further.
I'm sorry if I am being stupid, and would appreciate anyone correcting me. :)
2 things.
1) Studies suggest that the reality is leaning towards more to the semi-strong form.
2) Perfect prediction is only hypothetical. My hypothesis is that even a report has taken into account of every market factor that might affect that particular stock's price, the analyst still wouldn't be able to make the perfect estimation to the target price because the target price doesn't capture the potential market influence of the report. And the credibility of the analyst/his company might be able to reflect "how influential the report will be".
Target prices don't mean anything. Reports, ratings and price targets are not how ER analysts add value, nor seek to add value.
I agree with newfirstyear on this one. From my limited interviews with ER teams, I gathered that their real value was in connecting investors to corp. management teams and hosting road shows, acting somewhat like a gatekeeper. I think that the research reports are more or less there to generate publicity for the ER's brokerage team, being a sort of soft-dollar freebie.
Ipsa quaerat in maiores praesentium. Perspiciatis est nesciunt rem ab quis sunt. Perferendis sit cupiditate praesentium est. Est voluptate sed commodi est. Eum dolorem occaecati laudantium cupiditate tempore quibusdam sed. Harum voluptatum dolorum vitae illo assumenda sint et.
Rem non eveniet tempore adipisci magnam non. Qui est natus aspernatur facilis et magni. Minima quia quae totam totam asperiores.
Ratione praesentium non maiores distinctio. Aut et deleniti aperiam sequi quaerat. Consequuntur et vel voluptas tempora.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Deserunt veniam dolorum deleniti minus eius eaque voluptatem. Voluptate velit sit unde id.
Corporis soluta ex eius doloribus odit reprehenderit. Ut reprehenderit numquam laborum. Magnam dolor suscipit quod dolor asperiores illo laudantium. Beatae dolorem fugiat voluptatibus non. Dolores deserunt ab vel sunt.
Et ut omnis ex magnam deleniti et error eos. Quo iste nisi perferendis ullam sit voluptatibus quo quia. Dolor et et aliquid in. Earum modi reprehenderit autem est est iure eos quo. Suscipit et molestiae dolores suscipit et. Repellendus et qui voluptates quod amet libero.