Can someone please explain how to derive a price target using a ev/ebitda multiple. Thanks!
Multiple are used for comparison analysis
do you know what ev is? if you don’t, you’d have a hard time even knowing how to derive a multiple. if you do know what it is, think through exactly what it means. i’m not trying to be a jerk, but thinking through the problem can help you get there yourself.
Usually EV/EBITDA isn’t used for price target calculations, because in order to get to price, you’d have to multiply the company’s LTM/TTM EBITDA estimate with the EV/EBITDA multiple, and then back out the company’s debt but add back the cash before dividing by shares outstanding. Balance sheet items tend to vary a lot from analyst to analyst (due mostly to a number of analysts that do fairly sloppy modeling outside of the P&L), which makes price target calculations using EV/EBITDA pretty hairy. Generally you see EV/EBITDA as a means of takeover analysis (M&A, LBO, etc.)
Take EBITDA numbers since that is considered a more stable number apply a multiple that peers trade at given premium/discount for whatever reason. Take out debt, divide by shares outstanding.
Numi, I’m forgetting (or maybe never knew), what LTM is, and TTM. Can you refresh? YP, my sense on EV/EBITDA is that EBITDA is something readily available from recent financial statements or accounting equivalents (in the case of a non-public company). Then you take a look at total enterprise value (Value of Debt + Value of Equity - Cash) per $ of EBITDA for comparable companies in the market place and come up with an average ratio for the industry. From there you figure out an EV target value for your company by using known EBITDA and multiplying by the industry average EV/EBITDA, then adjust (subjectively or using some other model you like) to account for whether you think the company is above average or below average relative to the comparables. You may then subtract known debt obligations to come up with an equity value, or just keep the EV value there if you are going to buy the whole shebang. EBITDA is used to as a crude measure of free cash flow. If you have EV/FCF multiples, they should work better in theory (though others on this board probably have more practical experience about how well they work or don’t work). My guess is that in PE, the winning deals usually have a sufficient margin of safety that EBITDA vs FCF doesn’t make so much of a difference as to make it worth the extra effort in computation, but I may be wrong on that.
LTM/TTM both mean the same thing. LTM is an acronym for “last twelve months” and TTM is an acronym for “trailing twelve months”
I only disagree with one point here. You should never value a company on LTM (or TTM if you prefer). Always value it on what it’ll do next year or your forecast of its, say EBITDA, next year. A simple example, to see why is a company with TTM EBITDA of $5 purchased a company with $3 in EBITDA on the last day of the year. Assuming no synergies, the combined comp would have $8 EBITDA. If you valued the buying company off of TTM you’d be applying the multiple to $5 of EBITDA ignoring the acquisition that increases the company’s EV. So you always look at least a year out when using EV/EBITDA valuation or any comparable valuation.
strikershank Wrote: ------------------------------------------------------- > I only disagree with one point here. You should > never value a company on LTM (or TTM if you > prefer). Always value it on what it’ll do next > year or your forecast of its, say EBITDA, next > year. > > A simple example, to see why is a company with TTM > EBITDA of $5 purchased a company with $3 in EBITDA > on the last day of the year. Assuming no > synergies, the combined comp would have $8 EBITDA. > If you valued the buying company off of TTM you’d > be applying the multiple to $5 of EBITDA ignoring > the acquisition that increases the company’s EV. > So you always look at least a year out when using > EV/EBITDA valuation or any comparable valuation. any good analyst will proforma the ebitda for the extra $3 of ebitda purchased…
no sh*t myzegna…that’s the point - everyone on here was talking about ttm, you want to always look forward to next years when using a multiple valuation. i used a merger analysis as a simplistic example of why. We could go more complicated and get into a product introduction that will dramatically alter TTM ebitda to forward EBITDA (say an introduction of a new blackberry, or the ipod) if you want.
strikershank Wrote: ------------------------------------------------------- > I only disagree with one point here. You should > never value a company on LTM (or TTM if you > prefer). Always value it on what it’ll do next > year or your forecast of its, say EBITDA, next > year. > This is true for price targets and forward year valuation projections; however, when I mentioned the use of LTM sales or EBITDA, this is the valuation that is used for buyouts, M&A, etc. The reason bankers model comp valuation based on LTM data is because there can be too much variability in analyst projections going forward. Also, you don’t have FTM data for private companies. I have built dozens of comp sheets (more than I care to remember) and have also seen numerous banking pitches, and takeover valuation is always based principally on an LTM metric.
I agree numi, but when you do the LTM its all internal work and you buy it paying LTM but value it on FTM… meaning you pay for something that you feel that when your company takes over, can grow FTM…so you’re still valuing it looking forward but paying looking backwards…
OK, I see what you’re saying.