I just got this interview question an I’m intitgued, I do not have the answer.
If you have EV/EBITDA, and you extend your AP from 60 days to 120 days, how does it affect your EV/EBITDA multiple.
Please, if someone could explain the reasoning behind and the answer, it would be great
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Theoretically it should not impact EV/EBITDA.
EBITDA is a profitability metric not impacted by WC items.
EV suffers changes that offset each other. One one side, if you increase the number of days to get paid, your AR balance will go up, which means your cash is negatively impacted, increasing your net debt. However, on the other side, the amount of cash a company has it is priced in the share price, so technically if the company has less cash, equity value should go down, offsetting the impact of higher net debt on total enterprise value.
Prospect woulda got dinged
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