12 Comments
 

Multiple is how much you are willing to pay for the company / earnings of the company. Would you be willing to pay more or less for a risky company? Where it gets iffy is the trade off between risk & growth. The better the ratio between growth and risk, the higher the multiple (in theory). For example:

A) Low growth high risk: low multiple

A) Low growth low risk company: medium multiple

A) High growth low risk: high multiple

 

Generally, a company with a high EV / EBITDA multiple is deriving its value from expected increases in EBITDA. You could expect this to be the case if the EBITDA has been temporarily suppressed or if the firm is at an early stage of its life-cycle. In both cases, this would be associated with a risky business.

This should hold true in most cases, but not all as an EV / EBITDA multiple by itself is not meant to be an indicator of the risk profile of a firm.   

 

Generally speaking, yes.

Of course, many risky companies have negative EBITDAs, so that’s the exception, but of course those kinds of multiples are immaterial.

 

I’m objectively right you retard. No need to repeat the same exact thing as the three people above, and technically speaking, my description is accurate.

 

I thought that in credit analysis, high EV/EBIDTA indicates risk because EV includes debt and equity minus cash. So a company with a lot of debt relative to their EBITDA would be a riskier investment than a company burdened with less debt. 

In the real world tho, couldn't you also say that companies with lots of risk (not necessarily from debt, from macro and business factors too) are way less likely to enjoy a large multiple on the equity market? And therefore EV/EBITDA would be lower. 

You can define risk as risk of bankruptcy or risk of paying more than what you get... I guess it depends on what you mean by risk

 

I'm seeing some misinformation in this thread, so I will try to post an authoritative answer.

In principle, a company's enterprise value is inversely related to its level of "risk" (using quotes because risk is not well-defined or measurable). We can see this in CAPM - higher beta (our best estimate of "risk) = higher WACC = lower enterprise value. So, all else equal, higher risk = lower enterprise value = lower multiple.

Of course, as others have pointed out, many companies with high perceived risk also have high multiples, because they are expected to grow a lot. I'm not sure if there is an empirical relationship between beta and valuation multiples. But it's certainly not "always the case" that companies with higher "risk" have higher multiples.

 

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