Basic ratio questions?
Two variations on a theme here:
1. Ceteris paribus, will two companies with the same P/E have different EV/EBITDA if one is more highly levered? In which direction?
(It's tricky because if the levered company will have a higher EV (same equity value, more debt), but also seemingly a higher EBITDA (if earnings held constant, interest add-back makes a difference).)
2. Ceteris paribus, will two companies with the same EV/EBITDA have different P/Es if one is more highly levered? In which direction?
(Thought here is that the more levered one will have a higher P/E because the return to equity demanded is higher for the one with more leverage, so demand will push the price higher.)
Do not assume that for every additional $1 of asset value, you will realize $1 of additional EBITDA. It isn't a 1:1 ratio.
Of course, but in a vacuum, is there any way to see how the percentage changes will turn out?
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