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?

Comments (26)

Jul 30, 2015

EV = stockprice x shares - cash + debt

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

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Jul 30, 2015
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.

Jul 30, 2015

More correct than the original comment, but you I would make the argument that effectively the equity value of the company (i.e. market cap) will only increase by the incremental cash from different tax rates, but on an EV basis this would be nullified as you are deducting that excess cash via net debt

Aug 1, 2015

You'd have to edit the equation to (EV - PV(Future taxes))/EBITDA

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Aug 1, 2015

EBITDA... Earnings Before Interest, Taxes, Depreciation, Amortization. Your answer lies therein.

/facepalm

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Aug 1, 2015

Is EV not affected whatsoever?

Aug 1, 2015

Multiple should be higher.

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Aug 1, 2015

This is what I would guess, but what is the exact reasoning behind this? Increase in EV, and exactly why/how, i.e. what part of EV increases?

Aug 1, 2015

could be flattering for capital intensive companies....

Aug 1, 2015

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.

Aug 1, 2015

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.

Aug 1, 2015

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

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Aug 1, 2015

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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Aug 1, 2015

Read the fairness opinions for transactions in the industry you want.

Aug 1, 2015
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