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Simple Rule of Thumb --> if the industry is capital intensive, then use EV/EBITDA. It is independent of capital structure and presents the best view of operational cash flows in industries with heavy capex. Some industries that are capital intensive include: airlines, retail, manufacturers, defense, oil, and restaurants.
Also know the differences between: EBITDA, Operating Cash Flow, and Free Cash Flow.
what about healthcare and alternative energy companies? i am not sure if they are considered 'capital intensive,' what would be the important multiples to value these?
Yikes, don't get caught saying P/Sales in an interview.
Another important one to know is EV/Sales for tech companies, which often don't have positive earnings or EBITDA
As a note, there are very very very few public "technology" companies today, that have negative EBITDA on a full year basis. In order to go public in tech, you profitability, and some compelling growth story (doesn't have to be real growth... just a story)
Though if a firm has a lot of negative CF/negative NI which makes it hard to use most of your multiples, you can use Price to Sales.
I am wondering if it is okay to admit that you dont know the answer to a tech question during interview?
^^bananafreak
The technical questions usually come from a static pool. The WSO, Vault, and "Beat the Street" guides are excellent. Between the three, you should be covered technical wise. They are well worth the investment. You will be blind in an IBD interview without them.
without giving it a try? definitely gives a wrong impression..
To come back to the price multiples question:
Young start ups and healthcare stocks: it's better to use: enterprise value / sales ratio
Financial services: the traditional return on equity
For which types of firms are PE ratios most appropriate? When to talk about PE ratios and when absolutely not??
like e.g. a company like chevron dealing in oil and alternative energy sources??
Financial services is price to book or P/E ratio and DDM (i.e. equity cash flow).
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