Hello,
Can anyone please confirm if my thought process for following questions is correct or not.
What is the largest contributor to EBITDA of a Utility company ? Ans. Depreciation. Typically, Utility companies have significant CAPEX and incur high depreciation expense.
If two companies have same margin, growth and risk, then how can they have different EV/EBITDA multiple ? Ans. Assuming both companies have same net income (earnings), then company with higher depreciation will have higher EBITDA and a lower EV/EBITDA multiple.
I would really appreciate your feedback.
Help
My view on the 2nd question: you're on the right track, but I would rephrase the answer to address capex instead of depreciation, which is a mostly accounting metric (the key here is to address why, on an intuitive level, companies might be valued differently). The intuition is one company may have a lower capex profile generating the same amount of growth, implying a higher ROIC and therefore some sort of competitive advantage. Thus, the company with lower capex will trade at a higher multiple, with higher real cash flow - but if we normalize the multiple to an EV/(EBITDA - capex) basis, they might be closer/the same.
Another potential answer could be taxes, but there may be some double counting if that's already reflected in your discount rate (aka whether or not you believe WACC is a good proxy for risk - I don't).
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