Comparables Analysis Question
Hello!
A few weeks ago I had an interview at Citi and I got the expected "How to value a company" question. When I was talking about the trading comparables, they stopped me and told me: "Once you have the average of the EV/EBITDA ratio of the comparables, how do you apply it to your company? Do you use forward/expected figures or historical?" I did not really know the answer so said historical, but then they told me they use forward figures. Then, they explained to me that regarding Transaction comparables they used historical figures. From this, I have a couple of questions:
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Is this true? Once you have an average of the EV/EBITDA (for example) of your comparables (in which you take the latest reported EBITDA, right?) do you take an estimate of the EBITDA of the company you want to value? Which estimate, 1 year/2 year/3 year forward figure? Any idea?
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Regarding transaction comparables, I am assuming you're taking the EV/EBITDA which was used to value the company in the transaction. Do you use that ratio applied to the company you want to value with its latest reported EBITDA or with the EBITDA of the transaction moment?
I know these questions might sound stupid but I am getting a little bit confused.
Thank you very much!
Generally speaking:
Trading comps: Typically the metric that gets the most attention is EV / the next year of EBITDA. For example, now that we're in November, and for simplicity, most attention will be focused on EV/2018 EBITDA b/c that's directionally how companies are being traded on at this point in the year. If we were in January, we'd likely look at EV / 2017 EBITDA. If we're halfway, we might just eyeball the range or look at things on an EV / NTM EBITDA basis. The main thing is that you should be comparing things on an apples to apples basis. Ie: the "Estimate" year you asked about should match the average comps multiple you're using
Transaction comps: Usually it's helpful to show both LTM and NTM multiples, but since a lot of the comps you're likely to include are transactions involving private companies, you probably won't have LTM or NTM data for all transactions. It'll come down to what's available in press releases, news, etc, and you can use that to triangulate around where you think the multiple should be. Specifically to your question, you typically won't know what "ratio" was being used the value the company, it comes down to a lot of different variables. A press release might say that "X" valuation represents a "Y" multiple on LTM EBITDA, but that more for context
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