Question

Why and when to use multiple? How to assess whether the valuation results make sense in terms of the EV/EBIDTA multiple.

Answer 1

Enterprise value is sum of market value of debt and market value of equity minus cash. P/E is a good measure for the equity value of the company but when it comes to make corporate decision like like expansions, diversifications, mergers and acquisitions. EBITDA is a good measure as it gives the real picture of operating performance For a running business and for a stable industry, EV/EBITDA is used for capital intensive sectors like telecom and oil exploration sectors. EBITDA is good proxy for free cash flow, and one can know the payback period of acquiring the business. It will give us idea of number of years to get initial investment back. For valuing cyclical industries like metal and capital goods EV / EBITDA multiple is used as companies operating cyclical industries has vulnerable net profits and leverage hence EV/EBITDA is much better approach to value these companies compared to P/E multiple.