Trading multiple and growth rates
Hi all
Just trying to figure out the relationship between growth rates and multiples. If EBITDA growth is approx. 15% yoy and the company is trading at 10x EV/EBITDA, would that be a good buy or not? Just purely based on this fact and ignoring everything else. I'm trying to understand how growth rates justify multiples because technically, 10x EV/EBITDA means the company has to grow its EBITDA 10x in order to realise the EV. 15% yoy would take ages.
It depends on the company's ROIC. Multiples are generally a function of growth, ROIC, and cost of capital. It's a bit technical, but the relationship can be written as:
EV/EBITDA = {[ROIC - g] / [ROIC * (WACC - g)]} * (1 - T) * (1 - D)
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