Hey there, I think I'm missing something basic here. I'm familiar with deriving a price target for a stock based on things like EBITDA multiples, but I've seen people say things like "At $N EBITDA and a X% fcf yield, the implied price is $Y/sh for a Z% upside." What is the math there for deriving a price target based on the fcf yield?
Trending Content
Career Resources
If EBITDA = Cashflow, not uncommon for software companies for example, then a $10M EBITDA company and a 12.5% FCF yeild would imply a 8x FCF multiple, so $10M x 8x = 80M EV + netcash = Market value
Thanks for your reply. So if we're talking about a company where FCF is not equal to EBITDA then there's some unstated assumptions being made in the example I gave above, i.e. tax rate, capex, etc to derive the FCF number?
Ok so it's not anything technical or arithmetically oriented, as I understand your question.
If you see a sell-side report from JP Morgan, or something mimicking that, certain industries will trade more upon EBITDA multiples or free cash flow multiples (or "yields", 1/multiple) than others. Maybe every industry should trade on EBITDA or cash flow multiples. It is certainly relevant, in my experience particularly the cash flow part.
But it most common for EPS to dominate the valuation discussion even in this age of non-GAAP numbers. So analysts will decide upon a PE multiple based on peer companies and the relative growth rates. It is the same process using EBITDA or operating cash flow or free cash flow.
Using PE vs. EV/EBITDA or P/FCF should produce similar results in most cases. Companies with high debt levels will rank less favorably on EV/EBITDA. Companies with heavy capital investments will rank less favorably on P/FCF. Companies with extensive non-GAAP adjustments may rank less favorably on cash flow metrics.
Bottom line there is no science to the valuation metrics that investors deem most relevant. I would say that cash flow always, always, always wins in the end.
Dicta et assumenda magni est non. Omnis est ut rem amet laboriosam provident. Ea est aut explicabo cumque rerum eos. At ipsa ullam enim et nesciunt rem. In dolores quia quaerat corrupti ea. Distinctio reprehenderit fuga enim autem vero. Libero maxime voluptas voluptatem doloribus molestias eius ad.
Tempore et nihil sapiente sunt aliquid. Atque nobis est debitis eligendi doloremque ab id. Voluptatem eaque velit corporis est voluptas. Eligendi voluptas aut quibusdam laboriosam. Sint aut enim voluptas tempore ipsa ab dolor rerum.
Ipsam sunt laboriosam dolores. Id quo reprehenderit ipsam id tenetur at alias. Quia pariatur aut velit rerum enim et id.
Est quis reiciendis id et id cupiditate quidem. Molestias perferendis beatae porro ipsa. In voluptates eveniet in est quasi dolor provident.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...