Hi guys,
Why would you value a company based on EV / EBIT as opposed to EV / EBITDA - Capex? You would account for capital intensity in both cases but in which cases would you use one vs the other?
Thank you!
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You would value using EBIT if you believe that the D&A is more indicative of the capital intensity of the business over the long run (as D&A is a product of capex spending over many years).
This contrasts to (EBITDA - Capex) which only represents the capital intensity in that given period and not the historical capital expenditure (represented by D&A).
If you believe that the company is coming out of a highly capital intensive period and will reduce investment going forward, then (EBITDA - Capex) may be a superior EV multiple to use to demonstrate the capital intensity of the business.
It’s also used as a more objective measure given the myriad of assumptions that are made to depreciation (salvage value, useful life) that impact the D&A line.
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