So I received the following interview question: "You calculated EV/EBITDA multiples of five different companies and one of the multiples (let's call this firm 'company X') is extremely high / extremely low, i.e. an outlier in comparison to the other companies that are more or less all in line. Give me possible reasons that explain the outlier."
Well, I responded that company X's share price might have gone up significantly due to speculation on a potential acquisition or just a ridiculously good past performance of the shares, hence driving up the Equity Value and thus the EV -> EV/EBITDA up.
I also mentioned that company X's operational performance was extraordinarily poor and significantly below expectations. Hence X had a low EBITDA which drove the EV/EBITDA multiple up.
Vice versa for extremely low multiple.
Are these answers correct or what answers are interviewers looking for when asking this question? Thank you all.
Capital structure as well. Since you are using EBITDA the multiple is factoring in earnings before accounting manipulation and any effects of being highly levered.
If one company is newer, its growth prospects would drive a much higher valuation
I wouldn't go with capital structure. That's only true to the extent there are tax savings from increased leverage. The reason we use EV/EBITDA is because it's generally pretty independent of capital structure.
Thanks for the answers guys. I'm not sure about capital structure, could you please elaborate a bit on that?
Furthermore, do you guys think that my answers are ok, or are they not ideal either? The interview obviously is done anyway but I would still appreciate to know the perfect answer for future interviews.
FYI, the interviewers didn't seem to be fully happy with my response but they still went on with other questions, so I'm not sure whether mine was good or bullshit haha..
Theoretically, capital structure shouldn't affect your multiple unless the company is fucked/high insolvency risk.
Your answers were fine. Could also be that there were one time expense issues that screwed up EBITDA/the EBITDA isn't representative of 'normalized' EBITDA.
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