Jane Cash is analyzing BCC Corporation, a steel manufacturer. She notices that the company is selling at 4 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The EBITDA multiple for the market (S&P 500) is 8 times. Based on this data, which of the following statements is the least accurate? a. EBITDA multiples are stable over time, therefore BCC is attractively valued. b. The comparison of BCC’s EBITDA multiple to the market’s multiple is invalid, as BCC’s multiple should be compared to companies with similar characteristics. c. EBITDA multiples are a form of cash flow multiples. d. A problem with EBITDA is that some items that influence cash flow from operations are not accurately reflected.
B steel manufacturer, capital heavy, lots of depreciation on fixed assets. S&P500 is too diverse for this comparison when using only EBITDA. my 2 cents Rou
B
A
I would say A as ebitda multiples are NOT stable over time especially with a steel co. as they are highly geared to steel prices drivings sales/cogs. B is correct, it is invalid to compare to the market and you should compare similar companies… C is correct because EBITDA is a form of cash flow mult as FCF =CFO +int exp - capex and D is correct as some of the things that influence CFO are not accurately reflected (as in interest expense and dividends received)
Before disclosing the answer, how would your answer change if it was P/E? Same answer?
Dreary Wrote: ------------------------------------------------------- > Before disclosing the answer, how would your > answer change if it was P/E? Same answer? — Even if it is P/E I would still say a comparison of a steel company against the S&P500 is too broad of a comparison, you won’t get really good sense of the company’s value. It is much better to compare to the industry. Keep in mind different industries are in different Business cycles and developmental phases and the S&P is the average of the represented industries. So my answer would still be B even if it was P/E
roumancesoiree its asking which is least valid though? B would be valid the way its worded and the way you explain the reasoning - unless i’m reading your post wrong
You could use the P/E, however the comparison will not be so useful, I think we should compary the P/E of the company with the P/E of the industry
so you are saying that those statements made about EBITDA are just as valid for P/E?
tony2 Wrote: ------------------------------------------------------- > roumancesoiree its asking which is least valid > though? B would be valid the way its worded and > the way you explain the reasoning - unless i’m > reading your post wrong You know what I completely read the question wrong -_-;; Now that being said I guess I need to change my answer would change to A for the same reason, a multiple should be compared to its industry not the S&P 500. B) is a correct statement for my previous reason C) is a correct statement well… thats what EBITDA mutliple is a P/CF D) is a correct statement because Non-Cash CF items such as depreciation can influence your P/CF
I am not saying that, as it is possible that a company will have high revenues but low EBITDA (i.e. Wall Mart)
tony2 Wrote: ------------------------------------------------------- > I would say A as ebitda multiples are NOT stable > over time especially with a steel co. as they are > highly geared to steel prices drivings sales/cogs. > B is correct, it is invalid to compare to the > market and you should compare similar companies… > C is correct because EBITDA is a form of cash flow > mult as FCF =CFO +int exp - capex and D is correct > as some of the things that influence CFO are not > accurately reflected (as in interest expense and > dividends received) I think Tony is right EBITDA multiples ARE NOT stable over time, HOWEVER compared to P/E they are RELATIVELY MORE stable. Rou
Well no ratio is stable over time… I mean, P/BV, P/E… P/Sales… because the core business of the company change. I think both are A and B are not accurate.
strangedays Wrote: ------------------------------------------------------- > Well no ratio is stable over time… I mean, P/BV, > P/E… P/Sales… because the core business of the > company change. > > I think both are A and B are not accurate. Why would B not be accurate?
Good job everyone, yes it is A. The variability is mainly due to earnings, not deprecaition or taxes, etc., so P/E and EBITDA are all volatile but EBITDA is less volatile.
for a quick comparison you could compare ebitda or ratios of similar companies though leaving B to be correct
Because ratio are a useful instrument if you compare it with market ratio of the same industry…no with broad market indices such as the S&P…in the latter case, the information provided will not very insighteful if you want to fully understand a company financial trend. Regarding P/E, you can compare it to the average P/E of the industry to understand if a stock is understated or overstated
ohh…now I read the answer B… it says “invalid”…sooo… it is correct…it is just was I said early! 
A good tip for the real exam is to look up the question as you read the choices to make sure it is asking true or false.