Same EV/EBITDA multiple different P/E

If two companies have the same EBITDA multiple but different P/E multiples, is the one with the higher P/E multiple the more highly levered (ie. because net income is lower)?

On the other hand, if two companies have the same P/E multiple, but different EBITDA multiples, is there any way to tell which company is more levered?

 

ya but how do you know which company is which. A lower tax rate implies comparatively higher earnings, so mathematically the P/E should be lower.

But intuitively, a company with lower tax should trade at a higher p/e?

 
Best Response

Optimal capital structure vs non-optimal could imply lower WACC and higher EV. Lower tax rate is after EBITDA but there is value to be captured which would mean the EV should be higher and thus different EV / EBITDA multiples. As for the impact on the PE multiple, you might argue that the PE ratio of the company with a higher tax rate should trade higher because there could be more opportunity for their tax rate to come down in the future.

 

Wouldn't an easier way to think about it be to look at what happens below EBITDA (i.e. how do you get from EBITDA to Net Income)? There are a lot of "discretionary" adjustments such as D&A, and also other business factors such as taxes that could get you very different net income figures from the same EBITDA figure.

Leverage could be an answer too, but you have to be careful because there are multiple impacts of taking on debt with regard to valuation and earnings (as you point out).

 

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