EBIT or EBITDA
Hi guys,
I'm trying to learn some basic IB technicals and was really hoping for help with a few concepts please:
Isn't it better to value a company using EBIT rather than EBITDA because EBIT accounts for DA which is significant expense on the income statement?
Do people in investment banks sometimes value a company by applying a multiples to EBIT rather than EBITDA?
When should you use P/E, EV/EBITDA and EV/EBIT multiples?
If you multiply EBITDA by a P/E multiple, would you still get the Enterprise Value or would you get equity value?
Thank you!
Both are good metrics though EBITDA is definitely more commonly used. Reason being:
EBIT is helpful if say a tech firm is capitalizing salary costs as amort. or if a mining company owns equipment instead of renting.
Thanks, makes sense. I read somewhere that you tend to use EV/EBITDA for more capital intensive sectors like automative sector for example because it doesn't account for D&A.
Also, just another quick q please: For trading comps, would you apply a P/E ratio to Net Income or Earnings (and not EBITDA) as P/E is dependent on capital structure unlike EBITDA. And this would give you the equity value of the company. Similarly, you would apply an EV/EBITDA multiple to EBITDA and get the Enterprise Value.
Thanks so much!
EV/EBIT: usually used for Capital Intensive industries. D&A is not added back and acts as approximation it CapEx during the period. Hence it’s closer to FCFF EV/EBITDA: usually used for Non-Capital intensive industries. They usually don’t have a large CapEx so we add back D&A as it is closer to FCF for these types of companies.
Hope this helps.
This is a very clean explanation. Good job
Food For Thought
1.
-Warren Buffett
muh warren buffet
muh oracle of omaha
Ipsam quasi ducimus voluptate architecto. Officiis eum voluptatem doloribus. Labore distinctio beatae non et dicta quod laboriosam. At qui qui debitis optio occaecati. Molestias enim vitae enim ut minus consequatur. Aut voluptatem soluta repellat tenetur. Aut ullam perferendis rerum deserunt earum sit.
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...