EV/EBITDA Multiple

I read a book which claimed that the EV/EBITDA multiple is not affected by changes in taxation...I understand why EBITDA is unaffected by differences in tax, but why wouldn't changes in tax affect EV?

Wouldn't a company with a higher tax have lower retained earnings and thus lower EV?

 
Best Response
porsche959:

EV = stockprice x shares - cash + debt

Usually for multiples, you use current EV divided by fwd year ebitda

I accidentally gave you a silver banana (someone throw MS at him for me). The OP's point is that the market cap is influenced by the tax structure of the company and therefore EV / EBITDA isn't totally tax agnostic. However this is assuming that the market cap is driven by a metric which takes into account tax, e.g., could be an alternative to P / E such as P / EBT, or EV / Revenues, precedent transactions or (somewhat cyclically) EV / EBITDA.
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Certain types of businesses don't lend themselves to EV/EBITDA. Classic examples are tech start-ups where revenue is likely a more important metric. Similarly, in many healthcare deals (pharma?) EBITDA is not the best metric to use. I imagine, though can't confirm, that oil/gas is similar as well.

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dont think about P/E vs. EV/EBITDA as good vs. bad, etc. they are just different ratios that tell you different things. if a company's or a sector's earnings are meaningful, then you should certainly look at P/E to further differentiate companies (ie what you have to pay for a dollar of earnings). one could envision a scenario where 2 companies trade at the same EBITDA multiple, but one company is cheaper on a P/E basis. that is good information to know.

 

If you mean fundamentally then EBITDA is only a proxy for unlevered free cash flow so that's a shortcoming.

People tend to think life is a race with other people. They don't realize that every moment they spend sprinting towards the finish line is a moment they lose permanently, and a moment closer to their death.
 

Generally, your EV/EBITDA multiple will stay pretty stable because if your earnings are going up, your market cap will probably go up, increasing your EV. Same should apply to p/e ratio. If you think about earnings reports for companies, if they beat expectations usually the stock will go up due to the increase in earnings.

 

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