Valuation metrics for Industrials and E&C

What do you guys use to value industrial companies? They usually do not have a lot of debt.

Do you use EV/EBITDA or EV/EBIT? What is the main difference between these?

Also, how would you treat the CapEx in these companies?
CapEx = Depreciation?

Thanks for the help.

 

depends on the company you are looking at...if it's a mature company with a steady growth...it makes sense that its CapEx = Dep...if a growth company, CapEx would be higher

 
sof_2:
Thanks.

Can someone explain the difference between EV/EBITDA and EV/EBIT, and perhaps when you would use which?

as i said earlier, for a mature company, you may assume that Dep to be the same as your CapEx. in that case, EBIT accounts for the firm's going forward CapEx since you "subtracted" D&A=CapEx from your EBITDA. whereas EBITDA does not...obviously.

 
Best Response

Use bloomberg function "RV".

EV/CapEx? This gives a huge bias towards large companies because maintance Capex is not going to change much but EV will. You never want to just use CapEx in the denominator, because it is subjective to firm's management. If you want to incorporate Capex, the correct way to do this would be to use EV/EBIT+CapEx, because you want to account for the depreciation breaks as well in industrials.

Most of the time ev metrics are EV/EBITDA or EV/FCF, but you want to use if over operating income (EBIT) because it will give you a more realistic picture (for a Capex intensive firm).
For instance, say Firm A spends a lot on Capex compared to a competitor- Firm B (lets say EV is the same) Then, D&A is higher which makes ebit lower EBIT is lower Capex is higher

So when you do EV/(lower EBIT and Higher Capex)

The denominator offset eachother somewhat.

But generally, EV/EBITDA is more appropriate because firms can choose depreciation methods in certain LT Assets Ok back to work.

 

Ok, so just to make sure I get this right:

If we're dealing with a CapEx intensive firm, we want to either use EBIT or EBIT + CapEX in the denominator, correct?

This is because we don't want to compare two companies using EV/EBITDA if one is more CapEx intensive than the other.

LondonE1, so you are saying that if we are dealing with a mature E&C firm, we can assume that D&A=CapEx and therefore use EBIT as the denominator?

 

I wouldn't use ebit and capex together because it puts EXCESS weight into a company that's capital intensive. If you're putting the two together, why add the capex on the denominator? I would think that it makes more sense to just do EV/(Ebitda - Capex), which would be similar to EV/FCF. Either way, I'd stick with EV/EBIT, even though what MonkeyKingdom said about firms being able to tamper with D&A schedules is a very valid point.

 

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