Hey Fellas,
Would like to get your opinion on the following situation: Assume you have two companies with the same growth, revenue, EBITDA, industry. They have to different valuations.
What could be the reason for that?
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first thing that comes to mind is a different capital structure, but i'm sure it's not the only possible reason
Makes sense. E.g net debt adjustments.
But how about equity value?
you could argue that equity holders feel more at risk in a company using disproportionate amounts of debt over equity because of the fact that they're not insured, therefore requiring an higher return, which in turns becomes higher WACC and lower enterprise and equity value. Risk of bankruptcy might also be one of the reasons bringing value down here. Not even an intern yet so take it with a grain of salt, just my 2 cents
value of an asset is orthogonal to its capital structure finance 101.
but what about other factors excluding cap structure
Class is in session, so pay attention. Will exclude obvious capital structure reasons already commented.
a) you said same revenue and EBITDA. There are many cash flow items after EBITDA to arrive at cash flows and profitability. Taxes, net working capital, asbestos lawsuit payments, stock based comp, and so on. Important. Do not overlook.
b) you don’t actually know they will have the same growth in the future. You don’t have a crystal ball. You might think one company has a better management team, better marketing, a million qualitative factors you can’t control for.
C) one company could be owned by a Saudi sheik on sanctions list. One company could be on Chinese regulatory sh*t list. One of the companies could be Russian. You did not stipulate.
D) one of the companies could have a brand new multi billion dollar yacht in its PPE while the other has a collection of toasters. Maybe irrelevant to revenue, growth, EBITDA, but wouldn’t you prefer to own part of dat yacht?
that is very helpful points I haven’t thought about it
value is what someone is willing to pay for something.
that is one definition at least.
i would reccomend you stop thinking about this question from an accounting perspective and think about it in the context of real businesses.
what are they selling? maybe they have the same revenue but one is selling mud while the other is selling graphics cards.
their capitalizations are definitely going to be different.
if you are gonna think about accounting— remember that EBITDA and UFCF are very different, and UFCF is what the capital providers are really earning.
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