Negative Multiples?
I'm doing a comparable companies analysis and one of my valuation multiples is EV/EBITDA. For a handful of the comparables the EBITDA value is negative. My questions is, how would I input the multiple into my spreadsheet, being the value is a negative number? I've looked at numerous trading comps online and none of them have a negative multiple. I believe, in this case the EV/EBITDA is essentially immaterial, but I can't just leave the cell blank. Any help would be greatly appreciated!
Thank you in advance!
You have to ask yourself if that company actually is "comparable" given that there's a negative EBITDA.
Also look at forward/trailing numbers. If they don't help then this company simply isn't good for an EBITDA multiple and you have to look at revenue or gross multiples, which is how a significant portion of MM and lower MM companies are valued. In my (still early, I haven't been doing this for long) exposure most of the MM industrial and industrial services/materials firms we see are evaluated by buyers primarily on the basis of gross or net revenue. Yes, this is contrary to what you're taught at school but keep in mind that valuation can be very different depending on whether you're approaching it from the perspective of a strategic buyer, a financial buyer, or an academic.
Other thing to look at is to dig into the financial statements and see if there's anything you need to normalize to get to a more accurate measure of EBITDA on an ongoing basis. If say....it's a pest control company who had to clear out their inventory because a chemical they used got banned or (real life example) it's a family owned manufacturing firm and some of the owner/managers are drawing huge compensation packages that will go away post-acquisition then you probably shouldn't be using the official EBITDA and should instead adjust that number to reflect to see on an ongoing basis.
Sometimes this will push it high enough for the company to be back in the game.
Whether or not you want to show negative multiples is largely a function of the purpose of the analysis. If it's just to get a general sense of the market or see where specific comps are trading, then it can be helpful to leave them in for reference, especially if it's just a few that don't totally skew the average. If you're trying to drive valuation and assuming your target has positive EBITDA, then it could make sense to just replace negative multiples with "NM" so they are excluded from the average (to your point, don't just leave the cell blank) and have a footnote that says you're excluding negative multiples.
Thank you a bunch, i really appreciate the help
We'd just put down 'NM'
Negative Multiples (Originally Posted: 11/16/2017)
Hi, im creating a trading comp for the first time and wanted to know how to input a negative multiple into my spreadsheet. the valuation multiple i'm using is EV/ EBITDA and EBITDA is negative. How would I input "-9.8" into the trading comp? Thank you in advance.
Its not material. If its negative just make it NA or NM or whatever you want, but you would never show somebody negative multiples.
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