Why is equity value levered

sorry for all the finance questions, but i havent been able to find good, concise answers to them outside of here. Anyone know why equity value is levered? I know enterprise is unlevered because it is capital structure independent, but what about equity value?

 

Equity value is levered because, as an equity holder, you are at the bottom of the totem pole in terms of cap structure (under debt holders). So as a company adds more debt, the equit holder assumes more risk, hence becomes more levered.

 
gimmeshelter43:
Great explantion Mezz - thanks. One final question : why do multiples have to be levered-levered or unlevered to unlevered, but they cant be levered-unlevered?

If I'm reading this correctly, you're asking why you wouldn't use, say, P/EBITDA (as opposed to comparing two companies using levered vs. unlevered multiples).

A multiple whose numerator is levered and denominator is unlevered is mismatched; ie, as someone above said, you're not comparing apples to apples. Both numerator and denominator need to be either independent of OR dependent on cap structure in order for the multiple to be meaningful. Hope that helps.

 

If you are comparing 2 companies, by using the same multiples, you are putting them on the same playing field. In this case, by using unlevered for one, and levered for the other, you might be handicapping/penalizing one company because of the amount of debt they have.

Basically, you want to compare apples to apples so your metrics need to be consistent.

 
Best Response
Mezz:
If you are comparing 2 companies, by using the same multiples, you are putting them on the same playing field. In this case, by using unlevered for one, and levered for the other, you might be handicapping/penalizing one company because of the amount of debt they have.

Basically, you want to compare apples to apples so your metrics need to be consistent.

Thanks. Would you please also explain why P/E is always lower than EV/EBITDA? I didn't see an case when EV multiples are higher than P/E when running the compsheet. I understand equity multiples are generally " levered" but any underlying reason why P/E are higher than EV/EBITDA? Or what kindda value/meaning that these two groups of ratios represent?

 

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