8 Enterprise Value to EBITA g 1 T 1 Value ROIC EBITA WACC g \u00b9 g g \u00b9 WACC ROIC 1

8 enterprise value to ebita g 1 t 1 value roic ebita

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Enterprise Value to EBITA g (1 T) 1 Value ROIC EBITA WACC g § · ± ± ¨ ¸ © ¹ ± g g ± ¸ ¹ · ¨ © § ± WACC ROIC 1 NOPLAT Value g EBITA(1-T) 1 ROIC Value WACC g § · ± ¨ ¸ © ¹ ± Substitute EBITA(1 T ) for NOPLAT. Start with the key value driver formula. Divide both sides by EBITA to develop the enterprise value multiple. When computing and comparing industry multiples, always start with enterprise value to EBITA. It tells more about a company’s value than any other multiple. To see why, consider the key value driver formula developed earlier: 9
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Enterprise Value to EBITA g g T ± ¸ ¹ · ¨ © § ± ± WACC ROIC 1 ) (1 EBITA Value Let’s use the formula to predict the enterprise-value-to-EBITA multiple for a company with the following financial characteristics: Consider a company growing at 5 percent per year and generating a 15 percent return on invested capital. If the company has an operating tax rate at 30 percent and a 9 percent cost of capital, what multiple of EBITA should it trade at? 7 . 11 % 5 % 9 15% 5% 1 ) 30 . (1 EBITA Value ± ¸ ¹ · ¨ © § ± ± 10
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Distribution of EV to EBITA The majority of companies fall between 7 times and 11 times EBITA. If the company or industry you are examining falls outside this range, make sure to identify the reason. 11 Number of observations 1 Excluding financial institutions, real estate companies, and companies with extremely small or negative EBITA. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Enterprise value to EBITA S&P 500 1 : Distribution of Enterprise Value to EBITA, December 2009
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Why EV to EBITA and Not Price to Earnings? A cross-company multiples analysis should highlight differences in performance, such as differences in ROIC and growth, not differences in capital structure. Although no multiple is completely independent of capital structure, an enterprise value multiple is less susceptible to distortions caused by the company’s debt-to-equity choice. The multiple is calculated as follows: EBITA Equity MV Debt MV EBITA Value Enterprise ² Consider a company that swaps debt for equity (i.e., raises debt to repurchase equity). EBITA is computed pre-interest, so it remains unchanged as debt is swapped for equity. Swapping debt for equity will keep the numerator unchanged as well. Note, however, that EV may change due to the second-order effects of signaling, increased tax shields, or higher distress costs. 12
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Why EV to EBITA and Not Price to Earnings? To show how capital structure distorts the P/E, consider four companies, named A through D. Companies A and B trade at 10 times enterprise value to EBITA, and Companies C and D trade at 25 times enterprise value to EBITA. 13 P/E Multiple Distorted by Capital Structure Since Companies A and B trade at low enterprise value multiples, the price-to-earnings ratio drops for the company with higher leverage.
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  • Valuation, P/E ratio, PEG ratio, EBITA

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