Is P/E multiple better or EV/EBITDA?

Hello!

I think that both gives important information about the company so it is unlikely that one is better than the other. Both should be used hand in hand in order to be able to get a better picture of how the company is doing.

There are both advantages and disadvantages for both forms of financial ratios.

In terms of the disadvantage of P/E ratio, it does not reveal a full picture and is best used to compare only companies in the same industry or comparing companies against the general market. Also, the stock price may increase by a large amount if investors are overly optimistic which can cause an over valued pe ratio.

The EV/EBITDA ratio on the other hand may help to counter some of the P/E's disadvantafes. It measures the return that a company makes on investments. It will be able to provide a clearer picture of the financisal performance of a company.

Hope this helps!

You can use both! Bankers often use a range of valuation using different multiples to determine what is the value of stock.

The advantage of EV / EBITDA is that it is capital structure and D&A neutral, as compared to your P/E multiple. This means that this multiple can be more easily compared across companies that have different levels and type of debt, and also accounting policies and estimates regarding their D&A. P/E ratio would have taken all these factors in which would have affected the companie's bottom line.

The good thing about P/E multiple is there has been a lot of historical analysis and valuation previously using it, so the track record is definitely there if you want to do historical analysis.

What is a disadvantage of EV / EBITDA would be that it does not account for capital expenditures that is accounted for through depreciation. This is can be a huge aspect of very capital intensive industries as they need to reininvest their cash back to buy more equipment, which reduces the cashflow that flows to investors. For this EV / EBIT might be more appropriate.

There after, you can plot your valuation ranges into a chart like below.