Company A has a higher EV/EBITDA than company B, but company B has a higher P/E than company A, what are the possible explanations?
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Look at how to calculate Ebitda vs NI and you'll find your answer
I'm not 100% sure, but I think Company A has better gross and operating margins than Company B giving it a higher EBITDA multiple but company B has less depreciation and/or interest expenses relatively, giving it a higher P/E.
Assuming stock price and equity value are the same for both: Company A has weaker margins (gross, operating) and therefore lower EBIT, or a higher net debt balance, preferred securities outstanding, noncontrolling interests, etc or they have lower D&A expenses.
Company B has a weaker net margin; higher net interest expense (higher cost of debt) and therefore lower net income
There are a bunch of moving parts but I think these are some possible explanations
should B have a higher depreciation and/or interest expense, which makes its earnings smaller (the smaller the value of denominator is, the higher the value of the multiple is)?
best answer: capital structure
leverage
I agree with BBwayne- think capital structure- is P/E neutral? What changes this multiple? Now ask yourself the same question for EV/EBITDA? I have a similar question for you once you wrap your head around this one. If CO A and CO B have the same net income, but A is levered and B is not which one has a higher valuation? Why?
I think it depends on the level of debt you take on, up to a certain point, taking on more debt will give you a lower wacc, therefore increasing the EV. However, beyond that point, more debt also result in an increase in Re, which actually increases overall wacc, and leads to a lower EV. Is my reasoning correct?
Leverage can either increase or decrease P/E multiples depending on its net gain. Assuming same risk profile, CO B will have higher P/E. Leverage introduces interest expense but also increases NOPAT. You're left with the tax shield.
Company A has higher net debt (relative to B) and/or Company B has higher D&A, interest, and/or tax expenses (relative to A).
how can you tell co A has a higher net debt? Thx soo much！
Higher net debt = higher EV = higher EV/EBITDA all else being equal
this is the best/only answer
High P/E = expensive investment, which means investors who already have invested are willing to pay more because they feel that the company will grow in the future giving them a profit on their investment.
High EV/EBITDA = Similar concept. However instead of 'Price' you have EV which includes debt and is a metric of the whole company, not just its equity.
So basically Company A probably has a larger Enterprise Value and Company B has less. However Company B could be a smaller company with much more anticipated growth, thus why investors are paying more for it. P/E is more subjective than EV multiples.
There are many, many answers to this question
Higher P/E= Higher expected growth
B has more debt.
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Here's my take:
If A has a higher EV/EBITDA ratio than B -> A has higher debt -> higher interest payments.
Since earnings is EBITDA - D&A - Interest - Tax, if EBITDA is equal, B's interest payments are lower and they both share the same corporate tax rate, it should be that B has higher D&A.
Of course, if those assumptions are wrong then there are plenty of other explanations.
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