TEV / EBITDA vs. TEV / Sales multiples
Hey guys,
Is it 'wrong' if my enterprise value based on the mean TEV / Sales multiple of the peer group is much much higher than my enterprise value based on the mean TEV / EBITDA multiple of the peer group?
What would be the main reasons for a huge difference (say about $200 mm difference between the two valuations for a company that does 162 mm in sales)?
Thanks for any help.
For TEV / Sales to be higher than TEV / EBITDA, EBITDA would have to be greater than sales, which makes no sense whatsoever. Definitely check over your numbers.
i'm not talking about the actual multiples... i'm talking about the valuation i get if i apply the multiple to the ebitda or sales.
How comparable is the comp set?
How different are the EBITDA margins?
Do these companies even trade off TEV / Sales?
Is there some sort of anomoly? Adjustment to EBITDA or sales needed? Outlier?
The comp set is not extremely comparable, but there is 1 company within it that is virtually identical to the target. It has a 19.48% EBITDA margin, while the target has about a 7.5% EBITDA margin.
I don't know how to determine if they trade off of TEV / Sales... how would I be able to tell if that were the case (still a little new at this).
I adjusted the EBITDA of all comps and the only big outlier is one company, which actually brings the mean multiples of the peer group up quite a bit.
The valuation I get using the TEV / Sales multiple is about $350 mm, while the valuation I get using the TEV / EBITDA multiple is about $119 mm... the $350 mm is fairly close to my DCF valuation.
how does its EBITDA margin compare to the other companies? why is the margin so much lower than the other its closest comp? the EBITDA multiple is usually a much more relevant metric unless you're looking at a start-up or there's some other reason why you can't get a reasonably expected EBITDA margin.
this is for a case competition at my school... it's a fake company, basically a complete copy off of a public more well-known company. in the case, it is a private company.
the ebitda margin expected for 2010 is 7.5%. its closest comp in real life has an ebitda margin of 13.5% (just re-calculated it... was wrong the first time).
we are given historical income statements for 2007 - 2009, and projected income statements for 2010 - 2015, as well as historical / projected cash flow statements out until 2015 and a single balance sheet expected at the end of 2010.
it does not say when the company was started: it does mention that one of the members of the management team has been with the company since 2000.
It is definitely possible if your company has a much higher EBITDA margin than the rest of the industry.
For a simplistic example:
The industry averages: EV = $150 Sales = $100 EBITDA = $10
Ind Avg EV/Sales = 1.5x Ind Avg EV/EBITDA = 15x
Applying these to a company that does $100 in Sales and $20 in EBITDA will leave you with EVs of $150 based on sales and $300 based on EBITDA.
okay thank you techbanking, so conversely, if my target company has a much lower ebitda margin, it will have a lower valuation versus the sales multiple?
also, are there any industries where a sales multiple has a heavier weight than an ebitda multiple? and how should i attack the disparity between my comps valuation (based on that multiple... TEV = 119mm) and dcf (TEV = 400mm)? which one should be given more weight in the situation?
I'm only just going to graduate school in January, so I'm no expert, but here are my two cents. Hope it helps, and I'd maybe consider reading a couple chapters from a textbook or something too if you haven't already.
EBITDA is more relevant generally, I'd say you'd probably only want to put more weight on a revenue multiple instead if it's a special situation, like early stage company or something, and your EBITDA margins today won't give you a good picture of your EBITDA margins going forward.
So let's say you have 10% margin today, but market is pricing your stock assuming your margins are going to rise to something closer to the industry average, let's say 20%. Then based on this year's financials, maybe a sales multiple would give you a better picture of TEV, because your EBITDA number is lower than what you'll be getting credit for in a valuation (greater margins going forward).
So yea the first thing I would look at is the projections and see if the margins look steady or if they'll be rising to the average I guess. (And do you have forward estimates for comps? I'd def. also take a look at forward multiples.)
You value a company based on the net present value of its cash flows out to infinity. EBITDA is the closest "common" metric to free cash flow and Is almost always used in lieu of sales, unless the company is a startup (Which is not the case as someone has been around since 2000). Just stop using TEV/Sales and use TEV/EBITDA.
Source: I do this for a living
Basically, if your company has an EBITDA margin of 7.5% and the most comparable company has a margin of ~20%, then you need to take into consideration of the fact that your target company has yet to reach an appropriate level of EBITDA. One has to assume that there is some serious EBITDA margin expansion potential in the target, or else they're doing something terribly wrong. But given that the target is not close to "ideal" EBITDA levels, you can't value them off of EV/EBITDA. It would be like trying to apply a P/E multiple to a company who just turned EPS-positive. You have to wait until a company reaches reasonable scale to start applying an EBITDA multiple as the primary method of valuation. I'd stick to looking at EV/Sales, with your reasoning being that the target has yet to reach its ideal EBITDA levels -- thus, it is an inappropriate valuation metric.
Hope this helps.
EDIT: If your DCF is showing TEV of $400 million, my guess is there is significant EBITDA margin expansion forecasted over the next few years. If such is the case, then using current EBITDA is not applicable as it does not show an appropriate view of the company going forward.
Thanks for the help guys, I appreciate it and will take your advice.
Revenue & EBITDA Multiples = 0 (Originally Posted: 06/30/2010)
How do you interpret LTM EV/EBITDA and REV/EBITDA = 0? What would you do in this case?
context: i'm supposed to find the valuations of a few companies at the time of their IPO using the capital iq plugin for excel. i used the first pricing date..should I just take the first date when the multiples didn't equal 0?
THx
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