Hi,
From what I have understood, using EV/EBIT is better when looking at capital-intensive industries such as mining, automotive, telecom, oil, and transportation. This is because the D&A is likely to be somewhat representative of the firm's CAPEX needs and will therefore be a better proxy of the actual cash generated by the firm than EBITDA.
However, I am struggling heavily to understand under which circumstances EV/EBITDA is better and why. Can anyone provide examples of situations where EV/EBITDA is better than EV/EBIT?
DA
EV/EBITDA is better because it makes the multiple look lower/more attractive... Yes, D&A generally represents capex that will eventually need to be made, but the goal of finance is, frankly, to do deals, so we don't talk about that.
boom
Do whatever fits the story
EV/EBITDA over EV/EBIT - too much variability in accrual accounting depreciation methods (that only effect taxes from a CF perspective, so moot point)
P/FCF or FCF yield (for an equity mult) - takes into account (1) huge timing variations in growth capex budgets and (2) how it's financed among peers (e.g. huge pipeline buildout/capex sink in 2021E and 2022E, with fairly consistent, contractually guaranteed cash flows from 2023E through 2053E; is it financed with TL/HY/PIPE/pref offering, equity injection from sponsor, cash on the balance sheet, RCF draw, etc)
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