Valuation Multiples Flashcards
(15 cards)
What is a valuation multiple?
A valuation multiple is shorthand for a company’s value based on its cash flows, cash flow growth rate, and discount rate.
How do you calculate company value?
Company Value = Cash Flow / (Discount Rate - Cash Flow Growth Rate)
A company trades at a valuation multiple of 13x EV / EBITDA. What does that mean?
By itself it does not mean anything at all.
It means something only in relation to other companies and their multiples.
If other, similar companies in the industry are trading at multiples of 16x EV/EBITDA, then perhaps this company is undervalued.
How can you use valuation multiples in real life?
- The most common usage is to calculate valuation multiples for similar companies and see how the company you’re analyzing stacks up.
- To determine a company’s yield. If a company has a P /E multiple of 10x, that means you earn 1/10, or 10% for each dollar you invest in its Equity.
Would you rather buy a company trading at a 15x EV / EBITDA multiple, or one trading at a 10x multiple?
It’s completely dependent on what peer companies are trading at and how this company compares.
If every company in the sector is trading at multiples of 20-25x, then 15x might be cheap; if other companies are trading at multiples of 6-8x, then 10x might be expensive.
Could a valuation multiple such as P / E or EV / EBITDA ever be negative? What would it mean?
Yes, its possible for any valuation multiple to be negative.
If a company has a negative Net Income or negative EBITDA, the multiples will turn negative.
EV / EBIT versus EV / EBITDA, which one is better to use
You should never look at just one multiple when valuing companies
But, EV / EBITDA is better in cases when you want to completely exclude the company’s CapEx, Depreciation, and capital structure
Why is the P / E multiple not useful in most cases
It is affected by different tax rates, capital structures, non-core business activities, and more.
What is the main advantage of Unlevered FCF?
It’s capital structure-neutral, so a company’s cash flow will be the same regardless of its cash, debt, and preferred stock.
Also you always use Unlevered FCF in a DCF analysis to value a company.
What is EBITDAR?
EBITDA + Rental Expense
Could Levered FCF ever be higher than Unlevered FCF?
Yes, Levered FCF includes Net Interest Expense, so if the company had a negative value for that figure. It earned more in interest income than it spent on interest expense, and it also had minimal Debt principal repayments, then Levered FCF might be higher than Unlevered FCF.
Could a company’s EV / EBITDA multiple ever equal its P / E multiple?
Yes, its possible because Enterprise Value, EBITDA, Equity Value, and Net Income could be almost any values.
How do you decide whether to use Equity Value or Enterprise Value when you create valuation multiples?
You have to look at which group of investors this operational metric is available to: All the investors in the company or just common Equity ones.
One easy rule of thumb is to look at whether the metric includes Net Interest Expense. If it does, it pairs with Equity Value, if it does not, it pairs with Enterprise Value.
Should you use Equity Value or Enterprise Value with Free Cash Flow?
It depends on the type of Free Cash Flow. If it includes Net Interest Expense, you use Equity Value.
If it does not include the Net Interest Expense, you use Enterprise Value
