Hi, I was recently stumped by an interview question:
Hypothetically, if we were to look at two companies in the oil industry - Company A being a manufacturer of oil products and thus having a lot of fixed assets, while Company B is a distributor of oil products. Considering EV/EBITDA and P/E multiples, which multiple would you use to price each company and why?
Thank you and appreciate any guidance.
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Not sure if my understanding is correct, but as what goobinator mentioned below, I thought that capital intensive companies should use P/E instead of EV/EBITDA (assuming EV/EBIT was not mentioned in the interview), as capex is a significant expense for operations. In addition if both companies have similar growth trajectories, then using P/E implicitly shows that the company with a lower earnings has higher capex and hence a lower ROIC
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