Hey all.
I was wondering if anyone could provide some guidance as to when it is best to use each of the following valuation multiples EV/Revenue vs EV/EBITDA vs EV/EBIT. In contrast, when would it not be appropriate to use any one of these?
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Revenue multiple - business is not profitable (EBITDA 0) EBITDA multiple - the company is profitable, has stable margins generally and is not meaningfully capitally intensive (low cap-ex / D&A relative to rev)EBIT - similar to EBITDA with the exception being this metric will capture differences in the capital intensity / free cash flow generating ability of the company being valued. This metric is often substitutes for EBITDA - CapEx which is a proxy for an unlevered Free Cash Flow multiple
Following
from what I've seen, ebitdta is preferred by companies that have physical/tangible assets bc D&A is a considerable amount + causes a reduction in ebit/bottom line IS
why do you use EBITDA over EBIT for capital intensive / physical asset industries?
Because they spend a lot on PPE so they have large Depreciation numbers which can substantially reduce the EBIT number (since it takes into account D&A)
This isn’t right? You’d rather use EBIT in capex heavy businesses because D&A acts as a proxy for capex - you want to reduce by D&A / capex which is closer to an opex item in asset heavy businesses (but capex won’t be captured in EBITDA, so this is the closest way to measure it without going to FCFF)
Yes, you’re right. I was just saying if you want to look at what they make on a purely operational basis without taking into account capex investment then EBITDA makes sense to use
TEV/Revenue when a company is not profitable or has a very short history of profitability and is rapidly maturing. Generally more speculative approach to valuation used with earlier stage companies.
TEV/EBITDA or TEV/EBIT is intended as a proxy for valuation relative to cash flow. However, if a company has a lot of non-cash expenses (e.g. D&A), then your EBIT may be depressed relative to the actual cash flow of the business. To that extent EBITDA is generally preferred because it corrects for non-cash expenses. Fun comes in when you start having to adjust EBITDA for capitalized expenses...
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