We use the EV/EBITDA multiple to calculate a company’s value. This ratio is not difficult to understand and we look at how the leading consumer retail companies stack up.
Commentary
- Let’s start with the EV numerator – it stands for enterprise value or the sum of a company’s market cap and its total debt net of cash.
- EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Some consider this cash flow because it excludes depreciation and amortization which are non-cash accounting charges. While we prefer to use a company’s operating cash flow (presented in the cash flow statement) as a better metric for “cash flow”, EBITDA is a widely used metric by Wall Street, so we are comfortable using it for valuation purposes.
- A high EV/EBITDA multiple may suggest that a company’s depressed EBITDA is expected to normalize, or it may reveal investor expectation for fast EBITDA growth going forward.
- A low multiple may suggest low EBITDA growth prospects or perhaps an attractive value opportunity if the market is missing a company’s true EBITDA growth potential.
- While an EV/EBITDA multiple is a great starting point for valuation purposes, a thorough analysis requires an accurate EBITDA forecast beyond the LTM (last 12 months) period that we are using in the table below.
- In our next post we will look at how the consumer stock valuations compare using EBITDA forecasted for the next twelve months.
