Why doesn’t PE ratio take into account balance sheet risk?
I heard that one of the reasons why EV to EBITDA is superior to PE ratio is the fact that it takes into account balance sheet risk. However, I don’t see how this is the case considering the fact that a person needs to subtract interest payments to arrive at the net income that is needed to calculate PE ratio, whereas you don’t need to subtract interest payments to arrive at the EBITDA that is needed to calculate the EV to EBITDA ratio. Therefore, shouldn’t it be the other way around in the sense that PE ratio considers balance sheet risk and EV to EBITDA does not?
there are different reasons to use EV/EBITDA vs P/E. no one is outright superior. particularly for any company that has meaningful leverage, EV/EBITDA will always be used. I’m not sure what you mean by balance sheet risk exactly.
Yeah I don't quite understand what he means by balance sheet risk. Does OP mean leverage?
When he says :"levered," I believe he is talking about unlevered Beta on the capital structure, in which CapEx and Amortization will need to be factored into the off-balance-sheet financing arrangement with a revolving credit facility.
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