This question is from BIWS and that answer says most of the time these charges effectively increase valuation multiples because they reduce metrics such as EBITE, EBITDA, and EPS. What I'm confused on is I thought we exclude nonrecurring charges when calculating EBITDA. Or is that only in the case when we're calculating for FCF?
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If you're looking at a raw multiple, an increase in non-recurring/extraordinary expenses will increase the unadjusted multiple because it decreases the denominator(earnings, and sometimes EBITDA depending on where the company buries the expense). However, databases will often provide an adjusted/normalized multiple to account for items such as non-recurring expenses. You always want to use an adjusted/normalized multiple because most of the time, you are looking at valuing a business on its normal operations as a going concern.
For example, company A is looking to sell itself. EV of company A is 100M, with 10M in unadjusted earnings. It's raw P/E would be 10x. However, this past fiscal year it was hit with a 10M restructuring expense that isn't recurring and/or part of its normal operations. Therefore, the normalized earnings would be $20M if we add the restructuring charge back, indicating that the adjusted/normalized P/E is actually 5x.
The purpose of the exercise is to compare apples to apples when spreading comps, and to get an accurate sense of recurring cash flows when doing a cash flow valuation such as a DCF.
That makes sense. Thanks!
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