EBIT or EBITDA
Hi guys,
I'm trying to learn some basic IB technicals and was really hoping for help with a few concepts please:
Isn't it better to value a company using EBIT rather than EBITDA because EBIT accounts for DA which is significant expense on the income statement?
Do people in investment banks sometimes value a company by applying a multiples to EBIT rather than EBITDA?
When should you use P/E, EV/EBITDA and EV/EBIT multiples?
If you multiply EBITDA by a P/E multiple, would you still get the Enterprise Value or would you get equity value?
Thank you!
Both are good metrics though EBITDA is definitely more commonly used. Reason being:
EBIT is helpful if say a tech firm is capitalizing salary costs as amort. or if a mining company owns equipment instead of renting.
Thanks, makes sense. I read somewhere that you tend to use EV/EBITDA for more capital intensive sectors like automative sector for example because it doesn't account for D&A.
Also, just another quick q please: For trading comps, would you apply a P/E ratio to Net Income or Earnings (and not EBITDA) as P/E is dependent on capital structure unlike EBITDA. And this would give you the equity value of the company. Similarly, you would apply an EV/EBITDA multiple to EBITDA and get the Enterprise Value.
Thanks so much!
EV/EBIT: usually used for Capital Intensive industries. D&A is not added back and acts as approximation it CapEx during the period. Hence it’s closer to FCFF EV/EBITDA: usually used for Non-Capital intensive industries. They usually don’t have a large CapEx so we add back D&A as it is closer to FCF for these types of companies.
Hope this helps.
This is a very clean explanation. Good job
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