EV/EBITDA question
I understand that over times EBITDA will increase and if your EV is fixed then you will see multiple contraction as the years to one.
My question is this- couldn’t EV also go up over time if the market, the equity value part of the equitation, believe that this business may has a larger TAM or another long-term catalyst?
Is it wrong to thing of an EV/MULTIPLE as the premium that the market is placing on a business, the market opinion coming from the equity value part of EV, so a short term multiple contraction or expansion is a result of the market changing their long term opinion on the business?
EV can outpace EBITDA in the case that long term outlook improves. Multiple expansion is what is preferred by investors since it suggests just that. Contraction in the multiple suggests lesser future EBITDA which is bad for outlook, and hence, the business will be cheaper on a multiples basis. It all depends on expectations of future financials and the multiple will reflect that.
Contraction in the multiple would suggest an increased EBITDA, all else the same.
It means more current EBITDA, yes, but all else equal, when the multiple contracts it is indicative of poor future outlook
Contraction in the multiple can mean poor future outlook - Equity Value decreases or Market Value of Debt decreases. EV/EBITDA can also contract for many other reasons, none of which indicate poor future outlook.
what are the other reasons you had in mind?
assuming we're looking at public company valuations and excluding any effects of M&A/bidding dynamics, can't think of anything that would make it contract that doesn't implicitly factor in poor future outlook.
If we're looking at public company valuations and excluding any effects of M&A/bidding dynamics, can't think of anything that would make it contract that doesn't implicitly factor in future growth.
Holding EBITDA equal, it just becomes a question of what makes equity and debt market value decrease. Unless I'm missing something? Minority interest effects? Let's discuss.
Rd can decrease due to company-specific outlook concerns (credit risk) and macro outlook concerns, or simply because the company paid down debt. So, decreases in Rd don’t necessarily mean poor outlook, although it could. Other reasons for multiple contraction include an increase in cash. If you use an advanced EV formula, decrease in operating or capital leases and movements in several other accounts wouldn’t indicate poor outlook and would cause multiple contraction.
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