According to the M&I guide, you are likely to use the EV/EBIT multiple for companies in industries where D&A is large. The multiple will be sensitive to D&A.
Then why would a good industry-specific multiple for Retail be EV/EBITDAR (R = Rent)? Also according to the M&I guide, it says Rent is a major expense in the industry and one that varies significantly between different types of companies. If Rent is a big line item for companies in the industry, why exclude it? Doesn't this go against the logic for using EBIT instead of EBITDA for asset intensive companies?
Rent, as per most accounting guidelines, generally occurs as an operational cost. However, if you don't pay your rent, the result (eviction) manifests itself far more like a liability than a cost.
Think of it this way, when you look at a debt/EBITDAR multiple, you are trying to create an approximation of cash flow is available to service your debts, as you will not pay taxes until afterwards. However, many people will adjust the debt number to include debt+rents.
Make sense?
Thanks, I think so. So because Rent is conceptually more like debt and not really an operational cost, we exclude it.
So would it be right to say - For asset intensive companies, because assets are more critical to operations, EV/EBIT should be used because D&A should be looked at as an actual operational cost?
Correct me if I am wrong summing this up - whatever earnings metric you use in your valuation (earning) multiples, it should resemble an approximation of cash flows from operating the business? Like for banks, because of their unordinary capital structures, interest payments and related expenses are important to operations, so you look at net income multiples (P/E).
also makes firms in a sector where some pay for their building via debt and others via rent comparable.
Right, so for a mobile company (for example) you'll often see OpFCF (EBITDA-capex) because you can't exactly stop maintaining your network just to boost cash flow.
If you can't choose to stop paying something, it isn't exactly "free" cash flow.
you make the denom EBITDAR instead of EBITDA cuz you're includin imputed operating lease debt in the numberator within EV
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