Schweser (book 4 pg 254) says the EV/EBITDA multiple is positively related to the growth in FCFF and EBITDA. FCFF makes perfect sense, but how is it positively related to EBITDA? This seems to make no sense.
You want a low EV/EBITDA number. A high EV to EBITDA means there is a ton of debt and no cash in the business and/or low operating profits. So the EV/EBITDA multiple would be positively realted to growth in EBITDA and poitively related to FCFF, since you net out the cash to calculate the EV, which makes the numerator smaller. I think, anyway.
It acts like a PE multiple would. If there is a lot of growth expected, then the PE will be high. EV/EBITDA is the same concept, but includes financing. It is like saying the value of the firm divided by earnings available for the firm, rather than market value of equity divided by earnings available for equity (for PE)
I understand everything that was said and fully agree, however it’s a bit counter-intuitive to say a multiple increases as the denominator increases. Apparently the numberator increases by more, however I still find it to be a wierd concept.