Why do multiples go down over time?
Whats the most succint way to answer this?
E.g. EV/EBITDA...the EBITDA will increase over time, but won't EV (given it contains EqV) also increase over time? Never really got my head round it
EV is held constant for a given year. For instance, EV2019/EBITDA2019, EV2019/EBITDA2020, EV2019/EBITDA2021, and so on and so forth. If that ratio is going down, then the EBITDA must be going up, which is what you want to see in a business.
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Makes sense. Going a step back on the forward multiple point. Is holding EV constant simply so that there is some form of reference? or is there something else at play
Also if your multiple is not going down, then that is 100% always an error? as you would expect EBITDA to go up. Hence probably best to investigate and see why EBITDA has not gone up, e.g. maybe poor sales/shit hit the fan that year right?
You don't know share price by 2020 (or FYE 2019), so you don't KNOW forward EV.
In addition; that's what you can buy shares for at the moment, so that's what interests you.
So EV is as of TODAY and your EBITDA as per broker/your own forecast.
Multiples are based on growth and risk so over time growth is getting priced out of the multiple (i.e. going down)
The theory of intrinsic valuation holds that if everyone could predict the future, then assuming it doesn't pay dividends, the value of the company should be the same regardless of time. This is the intrinsic value of the company, i.e. EV is fixed.
That being said, even if you could predict the future, earnings should be increasing. So earnings change over time but EV does not. If earnings are increasing then your multiple should be contracting over time.
this is the correct answer ^
I'm not sure if this will exactly answer your question...
But here is something related from BlueMountain Investment Research (Mauboussin), hope it helps: https://www.bluemountaincapital.com/wp-content/uploads/2015/03/What-Doe…
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