Adjusting EV Multiples for leasing post IFRS 16
Somebody gave me this explanation:
EBIT deducts the full Depreciation expense on both owned PP&E and leased assets, but it does not deduct Interest from any source (Cash or PIK interest on debt, amortization of OID and financing fees, lease interest, etc.).
The rule with valuation multiples is that if you're adding a liability in the Enterprise Value numerator, you need to add back or exclude the full expense corresponding to that liability in the metric used in the denominator. And if you're not adding a liability in Enterprise Value, then you need to deduct the full expense corresponding to that liability in the denominator.
So, if you add the Finance Lease liability to Enterprise Value, you need to add back the Lease Depreciation to EBIT so that your valuation multiple is: (Enterprise Value Including Finance Leases) / (EBIT + Finance Lease Depreciation)
And if you do not add the Finance Lease Liability, your valuation multiple should be: Enterprise Value Excluding Finance Leases / (EBIT - Finance Lease Interest)
If you do not deduct the Finance Lease Interest here, EBIT is inaccurate because it deducts only part of the full expense associated with the Finance Lease Liability.
But it needs to be all or nothing for the valuation multiple to make sense.
My question:
Why do yo have to deduct the full expense corresponding to that liability in the denominator when you're not adding a liability in Enterprise Value. That is contra intuitive for me. You subtract expenses from a liability that is not even included in the EV. So why do you subtract the interest portion from EBIT? -> Enterprise Value Excluding Finance Leases / (EBIT - Finance Lease Interest)
Thank you in advance!
wdym bro, lease liabilities are recorded as debt post ifrs so yes your EV include the liability already. if your EV is DCF derived then it depends on your FCF build up.
My question is how you need to adjust EBITDA & EBIT for the EV/EBITDA & EV/EBIT multiples if you add the lease liability to the EV.
Et sequi at dignissimos commodi explicabo. Provident libero vitae quaerat. In modi quidem et rem officiis. Fugit eos quia vel necessitatibus et sint est. Est ad libero ipsam accusamus quia aut.
Voluptates omnis odit quos itaque distinctio eaque. Sed expedita possimus quibusdam. Laboriosam debitis molestias animi voluptas. Officiis maxime non voluptas aut cumque porro minima. Non et molestiae temporibus animi. Vel ex incidunt vitae et nesciunt eum ut veniam. Molestias natus ad mollitia accusamus sequi qui excepturi.
Dolores nam quas nihil officia corrupti laborum. Quas et molestiae sunt voluptas iste aliquid eveniet. Dicta consectetur omnis et et incidunt.
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...