Hi guys,
First entry on the forum so bear with me... ( also, happy new year to all )
I recently interviewed for an internship position for a boutique in London, thought it was going really well, got along with the analysts who were interviewing , etc but had one question that kind of threw me off a bit.
P/E vs EV/EBITDA multiples, which one is usually higher?
I obviously knew the differences and advantages vs disadvantages but no clue on a "right answer" for which one would be highest. So ended up just guessing P/E. then the interviewer kind of guided me to the difference that EV is for all investors and P/E refers to just equity.
After some thinking when walking home, I still couldn't figure out how that was relevant.
So all multiples based on EV are quite easy to compare, the further down the P/L you go, the more it's influenced by profitability. Since P/E is based on net profit, this is one of the factors influencing the difference so I could say that the multiple would be higher since normally there'd be less net profit in comparison to EBITDA, right?
However, it's not based on EV, but rather on the price per share, which is ultimately down to market sentiment. (that's one) This would represent the Equity part of the EV formula, which is most often lower than EV as well. So in relation to EV/ EBITDA, both P and E would be lower. (which would be a second consideration)
I know it's a LOT but I was hoping your brilliant minds could help a newbie out here on giving some feedback on my considerations and potentially guiding me in my thinking a bit.
Thanks?
I think your reasoning should be appropriated.
Even if I am not a valuation expert I honestly think that thinking too much on the differences btw the two measures in order to answer the question could be useless, cause too many variables are involved here (especially market expectations, number of shares etc.) and it should be almost impossible finding a meaningfull way to compare them.
The interviewer probably just wanted to test your knowledge and reasoning ability on this things.
Would say at a high level P/E would generally be higher, primarily because of the effect of leverage
Split each up into the numerator and denominator.
Is net income usually more or less than EBITDA? Why?
Is equity value usually more or less than EV? Why?
Thanks Henri! I was thinking along these lines as well with my reasoning but it just led me with both being less for P/E thus in order to find out whether the multiple is higher it depends on structure, profitability, market vision -as the equity value is more forward thinking than merely current valuation-,... leading to which decrease outweighs the other, right?
I should have just structured it this way though, yes...
From EBITDA to net earnings you not only subtract the cash out to the debt holders, but also D&A and tax which are not returns to investors. So generally speaking, for companies with PPE on their B/S, EV/EBITDA would be a lower number than P/E.
But this can't be a full consideration, can it? All else being equal, it would be... Except for the fact that EV and P is not equal. P is also usually lower than EV thus both numerator and denominator are smaller for P/E, bringing me back to square one.
Denominator goes down by not only that what is used to compensate debt holders but also with tax and D&A. So it goes down disproportionally compared to EV going down to EqV.
I am not sure about that but I think it could be less complex. P/E is an equity multiple while EV/EBITDA indicates the worth of company for all investors relative to cash flow generated. Required rate of return of shareholders is surely higher than that of debtholders, so P/E is normally higher than EV/EBITDA.
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