Quick question. I know they say you should use EV/EBITDA for capital intensive type company’s but I don’t understand why. If you want to compare companies that are capital intensive and that’s a major part of their business, wouldn’t you want to use a multiple that includes an interest charge? Or is it because capital structure can be changed so best to exclude it? Thanks
second part is more correct. we are trying to compare companies here. We want to exclude the effects of all that debt. Some would say this is a dumb idea but i think it helps get a better feel for pure earnings power rather than say EPS which is net income and after all the interest and stuff. Feel free to correct me if I’m wrong.
It depends what you are comparing…ev/ebitda is good for comparing firms with different capital structure. For capital intensive firms I would look at various cash flow and coverage ratios.
EV/EBITDA is frequently used to compare capital intensive companies because EBITDA is pre-depreciation and amort. So, even if the firms are using different dep methods, they can still be compared. Capital intensive firms have major dep. expense.