If I give you two companies with the same revenues, but one has an EBITDA margin of 25% and the other has an EBITDA margin of 40%, and they are trading at the same EBITDA multiple, which company would you purchase and why?
How does a better brand impact the financial statements?
What ratio can you use to compare companies without earnings?
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Brief answers, relatively confident about them. These answers are also incomplete, in that more could be added to them.
1) company with 40% margin- for the same multiple you are getting more EBITDA, which theoretically means you can distribute more to your shareholders.
2) better brand= more goodwill
3) ratios like ev/sales.
Someone correct me if I'm wrong.
Fair enough. For 2 I was assuming a transaction and the goodwill would be on the statements as a result.
Not 100% sure, but I'll give it a go--
Let's assume Rev is 100. Comp 1 would have EBITDA of 25 and Comp 2 would have EBITDA of 40. Let's assume they are trading at 8x EV/EBITDA, Comp 1 would be trading at 200 and Comp 2 would be trading at 320. So you would be paying more for the better EBITDA regardless, and I would recommend looking at other factors.
I don't think it does?
Given an older company with no earnings, I would use P/Lev FCF or EV/Unlev FCF as the company may be cash flow positive despite having no earnings. If this is not the case and the company is unhealthy, then it might be wise to look at liquidation multiples (P/Tangible BV). Given a younger company (like a tech company), I would use EV/S or a DCF to get a good valuation.
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