Would you rather have $1 increase in EBITDA or Unlevered Free Cash Flow?

CFA Level III
#1

I would say one dollar of EBITDA because you get a multiple.

Anyone agree or disagree?

#2

What do you mean by, “you get a multiple”?

I disagree.

Utterly.

#3

Yes! One might say that an increase in EBITDA, because it will increase EV based on EV/EBITDA multiple.

#4

From a PE point of view as you look to exit.

#5

If you have a $1 increase in EBITDA, what’s your increase in unlevered free cash flow?

If you have a $1 increase in unlevered free cash flow, what’s your increase in EBITDA?

#6

No one can disagree to see the related effects on many variables with changes in EBITDA but the thing is in LBO & M&A, top level gives high weights to entry and exit multiples to determine purchase price. Value of any business is in the mind of C-Level, free from subjective assumptions of discounted free cash flow valuation methodology.

It is not necessary to stick to EBITDA multiple only, relevant multiple to buy and sell a company is industry specific for example Pharmaceutical companies in my country sells at Revenue Multiple not EBITDA Multiple.

#7

100% FCF.

EBITDA is an input to arrive at FCF; a $1 increase in FCF would imply that your impact to EBITDA (tax-affected) must be greater than $1.

#8

Probably, though not guaranteed. It depends on the level of non-cash charges.

Nevertheless, as a general rule a $1 increase in free cash flow implies a greater than $1 increase in EBITDA.

Which was my earlier point.

#9

Non-cash charges would be added back, so not sure how the ‘level’ would impact it? If you have $1 of FCF, that would imply that any combination of non-cash, capex, NOWC delta would result in EBITDA >=$1.

#10

For a given amount of FCF, the greater the non-cash charges, the greater the EBITDA, ceteris paribus.