Tech analysis 101: EV/Ebita pls use this with PE
🔹Why use EV/EBITDA?🔹
EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) is a valuation multiple used alongside P/E (Price-to-Earnings) to evaluate companies, especially those with heavy investment. It's useful for comparing firms with different capital structures and has some advantages over P/E.
🌟 Enterprise Value (EV) = Equity market cap + Long-term debt - Cash
✅ Strengths of EV/EBITDA:
1️⃣ Rarely negative: Unlike P/E, EV/EBITDA is hardly ever negative, making it easier to compare companies.
2️⃣ Eliminates D&A differences: Depreciation & Amortization (D&A) can vary across companies, but using EBITDA eliminates these differences.
3️⃣ Eases comparisons: By factoring in debt and cash, EV/EBITDA helps compare companies with different capital structures.
❌ Weaknesses of EV/EBITDA:
1️⃣ Not indicative of Free Cash Flow (FCF): EV/EBITDA may not accurately reflect a company's FCF, which is crucial for valuing businesses.
2️⃣ Doesn't capture capital expenditure (CAPEX) needs: Since EBITDA excludes depreciation and amortization, it can't account for a company's future CAPEX requirements.
📚 Real-World Examples 🌐
🔸 Company A:
EV = $10 billion
Forward EBITDA = $1 billion
EV/EBITDA = 10x
🔸 Company B:
EV = $15 billion
Forward EBITDA = $2 billion
EV/EBITDA = 7.5x
👉 In this example, Company B has a lower EV/EBITDA ratio, suggesting it might be more attractively valued compared to Company A.
💡 Key Takeaways:
🚩 EV/EBITDA is a valuable tool for comparing companies with different capital structures or heavy investment needs.
🚩 It's essential to consider other valuation metrics like P/E and FCF when evaluating companies for investment.
🚩 As with any financial metric, context matters—understand a company's industry and competitors to make informed decisions.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
哇