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Anonymous
I've read up alot about Relative Valuations recently and with so many different types, such as P/E, PEG, D/E ratios, I'm not particularly sure which one is the most important in evaluating a company. What are your thoughts?
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Victor Chng
20 Feb 2019
Co-Founder at Fifth Person Pte Ltd
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Isaac Chan
20 Feb 2019
Business at NUS
Hi there! This is gonna get quite technical to be prepared!
One of the key multiples (Relative Valuation Ratios) is the EV / EBITDA ratio. EV stands for Enterprise Value, and EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. Enterprise Value stands for company's total value, often used as a more comprehensive alternative to market capitalization (share price multiplied by number of diluted shares outstanding. EBITDA typically refers to Revenue minus Cost of Goods Sold and SG&A expenses without minusing off depreciation. It is commonly associated with a company's operating income.
The EV / EBITDA multiple is commonly used because it is captial structure neutral. Often, different companies take on different levels and forms of debt, affecting their interest expense line items, which can be sizable for highly leveraged companies in certain industries. It also tax structure neutral, since companies from different countries are under different tax regimes.
EBITDA is commonly used because like EV, it does not include interest expense. Additionally, Depreciation and Amortization expenses are not included in its calculation. D&A are non-cash expenses, which means that they don't affect a company's cashflows directly. D&A can be affected by a company's accounting policies (and may not be related to actual physical events occuring in the company) and the capital expenditure cycle of the firm (purchasing cycle of long term physical assets / Plant Property and Equipment).
In essence, EV/EBITDA is a commonly used multiple because it removes the effects of tax regimes, capital structure and measures the total value of the firm.
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Hi,
Relative valuation (RV) does not determine whether the company is doing well. RV is use to value the company and give investors a guage on how much they are paying for the business.
To guage the status of the company, you should be looking at the following: