This is a quote from EOC reading 36 exercise 13 ‘rely on EV/EBITDA. Note that P/EBITDA does not take into account differences in the use of financial leverage.’ I am confused here, I thought EV/EBITDA is the one thats not considering leverage because it includes everything like inetrest and etc? what am i not undersatanding correctly?
I am also further confused by this particular comment from the answer of question 21 in the same reading
The price to sales (P/S) ratio fails to consider differences in cost structures. Also, while share price reflects the effect of debt financing on profitability and risk, sales is a pre-financing income measure and does not incorporate the impact of debt in the firm’s capital structure. Earnings reflect operating and financial leverage, and thus the price-to-earnings (P/E) ratio incorporates the impact of debt in the firm’s capital structure. This whole consider leverage business is driving me insane, I get how EBITDA is not influenced by the whole leverage issue because the interest is disregarded, but someone help me understand why P/S P/E is another sample of capital structure difference, is that because earning is clear of interest expense thus the huge interest expense is reflected? This seems to be conflicting with the intution behind why EBITDA considers financial leverahe, no？
EBITDA is suitable to be compare companies with different cost structures since it is not affect by the leverage
Think back to your Level I Corporate Finance: degree of operating leverage (DOL), degree of financial leverage (DFL) and degree of total leverage (DTL).
Fixed costs cause leverage.
Sales come before any fixed costs; therefore it’s an unleveraged number.
EBITDA comes before depreciation, amortization, and interest, much of which are fixed costs; therefore, it’s unleveraged (or, at least, not fully leveraged).