I’m still in the basics of valuation and trying to learn the concepts. I came across this concept of adjusting the EBIT. So, tried performing the calculation on my own to value these 2 companies. Am I correct in my calculation?
(1) Company A: Owns PP&E worth $ 1,000,000 with EBIT $500,000. PPE are used to perform the business operations
(2) Company B: Leases PP&E on rent of 30,000/year and owns property valued at 200,000. EBIT $100,000
Assume both are competitors in the industry and a seller is willing to pay 3x EBIT. Would it be correct if I say the following?
(1) Valuation of Company A:
3 x 500,000 = 1,500,000 + 1,000,000 = $ 2.5 M
(2) Valuation of Company B:
3 x (100,000 - 30,000) = 210,000 + 200,000 = $ 410,000
If Company B leases all PP&E, will it be correct if I say:
Valuation of Company B = 3 x (100,000 - 30,000) = 210,000 + 1,000,000 = $ 1.21 M
I’ll appreciate your help and comments. Correct me if I’m missing something here.