How do you use P/E in valuation metrics for a private company?

Hey - sorry if this is dumb, but was wondering when doing valuation metrics for certain companies they often like to use P/E instead of EV/EBITDA. With this said, if you're valuing a private company where you want to figure out P/E ratios, obviously precedents / public comps would give you the equity value after applying a multiple to net income, but how does this help you in figuring out total transaction value?

For example, at least with EV/EBITDA you're arriving at a figure that can be justified in paying to the target corporation, but when you arrive at Equity Value, how do you use this figure to arrive at total transaction value if you don't know the net debt of the target corporation? Seems it could make a huge difference in purchase price.

Thanks

Comments (14)

Sep 12, 2016

There are no P/E ratios for private companies because they're private. You can figure out price per share/earnings per shares if the company doesn't have shares. That's why P/E is only used when evaluating public companies.

Sep 12, 2016
LongIslandBound:

There are no P/E ratios for private companies because they're private. You can figure out price per share/earnings per shares if the company doesn't have shares. That's why P/E is only used when evaluating public companies.

I was referring to the equivalent of P/E for private companies, which is equity value / Net Income (or what I thought was equivalent).

In general, I'm wondering when you're screening for comps / precedents, how do you find net debt figures to correctly arrive at a EV?

Thanks

Sep 12, 2016

Are you referring to equity value as in assets less liabilities? That would be book value. Net debt would be in the 10k. If it's a private company, it wouldn't have its financials listed generally.

Sep 12, 2016

It's probably going off the standard enterprise formula to arrive at equity. You never see the equity value of those firms listed so i dont see the practical use of that figure but I've never used that book. Idk how you would find them without the public figures. Is this for a class? Look elsewhere in the book or ask your instructor.

Sep 12, 2016
LongIslandBound:

It's probably going off the standard enterprise formula to arrive at equity. You never see the equity value of those firms listed so i dont see the practical use of that figure but I've never used that book. Idk how you would find them without the public figures. Is this for a class? Look elsewhere in the book or ask your instructor.

Even if it is, if it's a private target (or even if your firm is looking at acquiring a private co), you'd need to find net debt of those companies to subtract from EV, right? Not sure if I was missing anything, perhaps it's just more useful to stay strictly for public / public comps and precedents? When introducing private targets, it seems like it's a huge pain to find all these financials to use.

Thanks

Sep 12, 2016
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