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
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
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.
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
You wouldn't be pitching targets to a sponsor that you just pulled off the internet. You would approach those firms, or they would approach you. An NDA would be signed, and they would give you an overview of their financials including net debt. You would get those numbers because the private firm would be giving you their numbers.
This is EXACTLY how it works. If you are going on about how you cant get financials for private company, you wouldnt even be able to get equity value from P/E multiples from comps right? Because that would require you getting the net income of the private company which you probably have no access to unless an NDA or whatever is signed.
However, your question becomes relevant when its some sort of aggressive takeover of a private company instead of a private company engaging an investment bank to look for a buyer. In such cases, I would think a reasonable amount of money would coax private companies into serious discussion leading to the NDA stage. If not... I could think of finding average net debt of public comparables companies and applying it to the equity value you found?
Hope this helps!
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