EV / EBIT vs EV / EBITDA - Capex
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!
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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