Interview Help with Multiples
Came across these questions, and I wasn't sure how to answer. I'm hoping someone could help.
A company has a 2017 EV/EBITDA ratio of 10x. The same company has a 2018 EV/EBITDA ratio of 8x. Is this a good thing or a bad thing? What could cause this to happen?
If one company has an EV/EBITDA of 15x and the other company has a multiple of 20x and they are in the same industry. Which company would you want to divest?
I think you would divest the company with 20x multiple for the second question since you are paying more for each dollar of earnings
Not necessarily a bad thing - it could've been an inflated year, and now valuations are starting to normalize, or they improved their EBITDA and EV just didn't move, etc.
It depends on a lot of factors and not just a simple multiple. You'd have to know if one is bigger than the other, if one has a competitive advantage that isn't available to the other, how each other's margins are, etc.
The numerator, EV, is a snapshot of today's value, and thus is the same in both calculations. Which means the denominator, EBITDA, is growing. That's what you'd want and expect to see, generally.
You probably sell the 20x. Looking at two comps doesn't really tell you anything - The market could be over or undervaluing one or the other, one could be growing faster/slower, have better/worse margins, etc - but if you have two companies each paying you a dollar of cash, sell the one that will get you $20.00, not the one that will get you $15.00
54321
Pretty sure the EV comment is wrong. EV is the EV at that year, comparing present day EV to a different year EBITDA doesn't make sense.
I'm not sure why HowlerMonkey got monkey shit, but he's right and there is a lot of confusion on this thread about dated EV / EBITDA multiples.
If you are looking at any dated multiple, you are using current EV divided by the metric for that time period. (e.g. if I'm looking at 2019 EV to EBITDA, I take current EV and divide by projected 2019 EBITDA). So having a lower forward multiple is just indicative of a company which is growing it's EBITDA (a normal situation). If forward multiples are higher than current multiples, that indicates a shrinking company (with respect to whatever metric you are evaluating).
This is correct. For a public comps pull you use EV at a point in time (usually last close), then divide that by each respective year's financials. So the EV is fixed.
Why are dated multiples always done like that?
I'm very new to all this, but it intuitively seems to me that 2017EOY enterprise value / 2017A EBITDA could be informative in at least some cases. For instance, if you have a near-perfect comparable involved in a recent take-private transaction, you might not be able to easily determine today's EV. But you can put together a relatively recent data point, where assuming market conditions have held somewhat constant, you can extrapolate a market value from the target's EBITDA. - I guess people don't do this, but it's not obvious to me why not.
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