Our analyst asked me the following today. Our associate got it wrong. Now I am concerned. Any shot takers?
-6/30 LTM EBITDA: $10mm
-6/30 Trading Multiple = 5x
-6/30 Enterprise Value = $50mm
-9/30 LTM EBITDA: $15mm
-9/30 Trading Multiple = 6x
-9/30 Enterprise Value = $90mm
Change in EV over period: $40mm.
Question: What % of the $40mm uplift in EV was due to changes in EBITDA vs. changes in trading multiple?
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25 from ebitda, 15 from multiple
% change due to EBITDA = (15-10)*5 = 25/40= 62.5%
% change due to multiple expansion = (6-5)*15 = 15/40= 37.5%
Exact same question as how much EBITDA growth came from revenue vs margin. Have to take the expanded base number (whatever it is - there it is revenue, here its EBITDA) into account
Depends how you allocate the increase in EV due to both increase in EBITDA and multiple.
Increase due to EBITDA: ($15M-10M) * 5x = $25M (62.5%)
Increase due to multiple: $10M * (6x-5x) = $10M (25%)
Increase due to both: ($15M-$10M) * (6x-5x) = $5M (12.5%)
Depends on the story you’re trying to tell. If I was a sponsor trying to show value from increasing earnings vs timing market would allocate the $5M combo term to EBITDA growth.
Yep this is how I'd look at it too, but typically I'd go 1 step further and not just have "EBITDA increase" but break that apart into revenue growth and margin expansion.
In my opinion you should split the covariance between the two terms equally. Therefore, multiple impact is (6-5)*(10+15)/2 and ebitda growth impact is (15-10)*(5+6)/2.
in other words 31.25% multiple and 68.75% ebitda growth.
very few people in the industry understand the concept of covariance
Interesting solution. Where can I read more about this?
Online articles normally get it wrong. I recommend doing the algebra yourself (it’s the same as for price volume maths)
This is the same solution as the "most helpful" one where the attribution from increase due to both is split 50/50.
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