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)
Sed incidunt excepturi repudiandae aperiam inventore quas. Fuga fuga eum illum. Omnis consequatur odit magnam aut sit suscipit. Cumque explicabo ad eos soluta expedita est ipsum. Ea reprehenderit in voluptatibus ad optio.
Magnam perspiciatis est deleniti qui alias quisquam nam. Error fuga enim sunt quis fugit assumenda. Omnis autem rerum sint aut maxime iste.
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...