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.