Originally posted by kumardiwesh
For what kind of companies do we use EV/EBITDA multiple?
When would it make sense to use EV/EBITDA over P/E? |
Though this question appears to be directed at Basantji, I would attempt to answer that.
Companies with High Debt, or High Cash on the books.
For example companies like HOV Services, Vardhman Textiles even though quote at very low P/E they are not cheap since they have high debt on their books. So on EV/EBITDA basis they are not that cheap.
On the other hand an highly cash rich company may appear expensive on P/E basis but in reality it might not be so.
I for one prefer looking at EV/EBITDA more than P/E.
Like there are some auto ancillaries companies where P/E are at 6x-7x in line with there peers but have a lot of cash and are trading at below 3x in EV/EBITDA basis which means even if they are able to maintain there EBITDA for next 3 years (forget growth) to justify a rerating.
As equity investors why do we need to consider EV at all...or for that matter EBITDA?
All we need is price and EPS |
Because equity investors only have a residual claim to the business.
Because EPS is easier to manipulate than EBITDA
EV/EBITDA and EBITDA margins are a better comparision tool for peers in an industry than P/E and net margins
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