For private equity sponsors or long- term investors, which is better for each entity, higher revenues or higher EBITDA margins. Let's say Co. A has revenue of $120, margins of 10%, Co. B has revenue of 150, margins of 7%. All arbitrary numbers.
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Interesting question. Assuming the two companies are close to the same (same industry, similar operations), I'd take the margins but I'd want more info if I could get it.
Proportionately higher margins means more cash flow/higher exit. Say you have 10% growth for both of the above companies, A increased EBITDA by 1.2 while B only increases EBITDA by 1.05. Over time, A will increase EBITDA more quickly than B, leading to a higher valuation.
I'd think that, in general, the company with the lower revenue has more opportunity for growth. At some point you can't really grow more than the market, but a smaller company can often times serve markets that bigger players can't/won't and they could also have the opportunity to steal some share if they have a better technology.
Higher margins would lead me to believe that A has some sort of advantage over B. Could be a better technology, could be sourcing, could be lower overhead, but, again assuming the two businesses are similar, A likely has some advantage.
The higher margins MIGHT be enough to get a better multiple over B. If the higher margins are irregular for the industry, you could make a case for greater multiple expansion.
All that said, there's definitely a point where you're indifferent. If it's two small companies in a large industry and you're talking about A with 10% margins on $120 and B has 8% margins on $150, I'd still take the higher margins but assuming same growth and multiple then it'll be the same valuation.
You could probably make the case that a long-term investor may go for the higher revenue because they have time to improve the margins, but then you go back to point 2 and focus on greater growth and higher margins make sense.
It depends...sometimes it's easier to push revenue growth, sometimes cutting fat is an easier lever to pull.
Are companies usually valued at an ebitda multiple more often than revenue? What metric would be used when valuing a company and why so?
It doesn't matter, what matters is entry multiple and growth rates lol.
hey intern, perhaps use that attention-to-detail that you were supposed to build on the desk and refrain from using your necromancy powers to resurrect a 5 year old thread. especially if your answer is going to be stupid like that one
Me resurrecting this thread got the GOAT m_1 to comment so I see it as an absolute win and net positive for society.
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