sorry for all the finance questions, but i havent been able to find good, concise answers to them outside of here. Anyone know why equity value is levered? I know enterprise is unlevered because it is capital structure independent, but what about equity value?
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Equity value isn't always levered ... and neither is EV ... it is only levered to the degree the B/S is levered.
Also, a portion of Equity value is the value of the CBs (which are carried as debt) until converted but once again it is only to the degree the BS is levered
Equity value is levered because, as an equity holder, you are at the bottom of the totem pole in terms of cap structure (under debt holders). So as a company adds more debt, the equit holder assumes more risk, hence becomes more levered.
^^ right basically the equity value always takes into account the debt so you're levered whereas enterprise value takes into account both so you're not levered ...
BUT ... like I said - the caveat is only if there is debt to begin with
Great explantion Mezz - thanks. One final question : why do multiples have to be levered-levered or unlevered to unlevered, but they cant be levered-unlevered?
If I'm reading this correctly, you're asking why you wouldn't use, say, P/EBITDA (as opposed to comparing two companies using levered vs. unlevered multiples).
A multiple whose numerator is levered and denominator is unlevered is mismatched; ie, as someone above said, you're not comparing apples to apples. Both numerator and denominator need to be either independent of OR dependent on cap structure in order for the multiple to be meaningful. Hope that helps.
If you are comparing 2 companies, by using the same multiples, you are putting them on the same playing field. In this case, by using unlevered for one, and levered for the other, you might be handicapping/penalizing one company because of the amount of debt they have.
Basically, you want to compare apples to apples so your metrics need to be consistent.
Thanks. Would you please also explain why P/E is always lower than EV/EBITDA? I didn't see an case when EV multiples are higher than P/E when running the compsheet. I understand equity multiples are generally " levered" but any underlying reason why P/E are higher than EV/EBITDA? Or what kindda value/meaning that these two groups of ratios represent?
^ yeah. Comparing EV/EBITDA multiples, you will 'neutralize' or strip away the effects of capital structure as interest payments for debt are no longer considered. Thus you're comparing apples-to-apples.
Equity value is levered because equity holders pay the price of additional leverage, interest.
Any interest paid to debt holders is money coming out of the pockets of the equity holders.
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