Please do correct me if I am wrong. (using market approach) From my understanding, when a company is capital intensive it would make sense to use EBIT multiples. Because D&A is high and takes away from the real value of the company.
Instead the VP said well use EBITDA multiples because it’s “standard”. Can you explain to me why? Doesn’t it make sense to use the EBIT multiples...
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For industries with reserves (i.e. Oil) you would either use EBITDA, EBITDAX (Exploration Costs), EV / Reserves, EV/ Daily Production...there's a myriad of metrics you could use. You kind of explained it, but you have it backwards. Since companies have varying levels of capital expense (DD&A related to it), Interest, taxes and exploration costs you would want to include it in your earnings. If you were to use a multiple like EV/EBIT, knowing that the industry comps can have significant differences in capital outlays, it would be like comparing apples to oranges.
So because they have different capital outlays we would use a broader approach (i.e. EBITDA, EBITDAX, etc.) to keep apples to apples, is that right? In what instance/industry would EBIT multiples make the most sense?
I would say that using EBITDA allows you to compare similar companies based on earnings you can expect across the group. Honestly, I haven't come across EV/EBIT but I work in natural resources.
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