Why low multiples matter?
Hi :)
I am preparing interviews in private equity and I have a question.
How come a company with a lowest valuation multiple ( say EBITDA for ex) will be more attractive that a company with a higher valuation multiple?
I dont understand because multiple are relative.... So i dont see the point/logic behind this...
In general, a lower multiple means you're spending less money for a $1 of earnings.
Another point you should consider is that a company which trades at a lower multiple than the industry average may be undervalued.
But - a company with the lowest valuation multiple will not always be more attractive than a company with a higher valuation; a lower multiple can come from an increased risk, cyclical business, etc.
Thank you very much for your answer :)
Why would it be undervalued ? Can't it be that the firm has a very strong ebitda, hence the lower multiple?
The multiple is an implied measure, not the explicit one. In a transaction you know the price and the various figures from the financials of the company.
So, assuming no cash/debt, you can buy a $20m EBITDA business at $200m (10x multiple) and then you sell it for $300m with a $25m EBITDA at a 12x multiple a year later. You make a profit for the combination of the increased multiple (so called multiple expansion) and EBITDA growth. But you might also face a loss for a business with a increasing EBITDA which is selling at lower multiple (e.g. $180m with a 7,2x multiple). Given that you don't know the multiple you are going to get when you sell the business, the lower the better.
Buy low
sell high
Et a nam nihil dignissimos cum. Veritatis similique repudiandae delectus mollitia. Voluptas magnam dolor quia totam. Esse ullam quaerat deserunt.
Suscipit officia rem et autem eligendi. Velit possimus labore ipsam aut quo in. Omnis modi ut tempora numquam architecto.
Pariatur perferendis atque voluptas perspiciatis. Iure ut tenetur ducimus in nostrum. Soluta id voluptatem dolorum voluptatum tempore tenetur rem. Vero reiciendis assumenda ut dolorem iste et dignissimos quibusdam. Temporibus nostrum blanditiis voluptates et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...