Hi everybody! I’d be very appreciative if someone helps me to clarify the following issue that’s been discussed by my bank’s head of research and analysts: How do we calculate a forward-looking EV/EBITDA multiple? On the denominator side it’s quite obvious - we use our projected value driver EBITDA (e.g. for 2008, 2009, etc). On the numerator side there’re different opinions: 1) leave numerator as a constant, so basically use the same net debt; 2) use projected net debt for the same period as we project EBITDA (e.g. EV/EBITDA(2009e)=[(current MCap+ Net Debt (2009e)]/EBITDA(2009e) I personally studied that forward-looking multiples are “forward” in terms of a projected value driver - denominator (in this case EBITDA), and not a numerator . What do you use/think from you experience? I am a level 3 candidate, but frankly speaking i don’t remember that CFA Program LOS’s adress this issue in detail. Thanks! Dmitry
well, if you were to do a “forward” EV/EBITDA calculation…normally you use most recent enterprise value divided by forward 12 months’ EBITDA that being said, the EV/EBITDA multiples you see are almost always based on LTM EBITDA figures simply because there can be too much variability in projections, and also because the acquirers are most concerned about what has happened to the target business in the last 12 months. once acquired, the acquirer can lay on a new capital structure onto the target or also change its operational tactics such that forward projections are no longer relevant, which is why you generally see the multiple being referenced based on trailing numbers. of course, i have seen EV/EBITDA calculations based on forward projections too, but nobody on the street really cares about them.
Why would you use forward EV? When you caclulate P/E do you take your projected price target?
“Why would you use forward EV? When you caclulate P/E do you take your projected price target?” I personally wouldn’t use it as projected… but this issue was raised as a bank-wide software calculates EV using projected net debt of say 2012… of course we use current price for P/E ratio and only use projections for earnings assuming its a leading multiple. The logic of the “softeware creators” is that in some industries (especially here in Russia) current debt levels are so small, that in a couple of years debt burden will most likely increase like 5-fold for some of the companies… I work in equity research and haven’t seen a “projected” EV calculation, but some guys from M&A say that they use projected debt for EV calculation as they are interested in acquiring a company in some future time when, as they say particularly in Russian reality, this DEBT is likely to increase…
EV is agnostic about net debt levels. If you are assuming higher levels of debt in the future, that debt could only be used to invest in the business or pay down equity. In the former, that affects your forward EBITDA assumption. For the latter, the impacts “net” out so to speak for the EV calc (i.e. net debt goes up, but market value of equity goes down). You would have to do your fancy math to figure out the impact per share.
My question is similar to this. If you were looking to sell a company in a year or so, how would you estimate the future sale price today? I’ve been reading through Damodaran to get info but I’m starting to spin my wheels. Typically, how do you calculate forward looking multiples? Is there a way to get industry average multiples via Bberg?
Glad to see you back, QJ. Yahoo can also give you industry multiples if you don’t have a BBG subscription, though I’ve often wondered how it goes about classifying industries. Presumably multiples expand and contract over the business cycle because the near term cash flows are more valuable than the far term cash flows, and the value of those will fluctuate over the business cylce. Then the next question is how sentiment affects the multiples. With that, I don’t see how you can do much other than look at long term averages. Possibly if you are clever enough, you can have some kind of demographic model that looks at the demand for cash vs risky instruments and as the demand for cash goes up (say for retirement expenses) then the risk premiums go up and that will lower multiples over time.
theres no point in projecting debt in my view. EV should approximate the value of the net operating assets. people tend to define it in terms of the liability side of the balance sheet as market value of equity plus net debt, because thats how you calculate it. but thats of course equal to the net operating assets, i.e. cash-flow generating assets (including intangibles) plus net working capital. the projected fluctuations in the net debt will affect your future leverage but not the value of the net operating assets, absent of any other info. unless you know management is going to borrow in order to finance a specific expansion project which you can quantify and whose impact is not already priced in the current market cap, i wouldnt touch the numerator when I calculated forward EV/EBITDA multiples
I object to a thread in which we all raise interesting questions that relate to the analysis of financial statements. Some of you are guilty of giving answers that appear to be both well-reasoned and well-written. This…is an outrage. I expect less of us. Can someone please come in here and advise me on how to transition, ultimately, to a role as a hedge fund PM or investment banker? My background is in food prep (12 years). Thank you.
supersadface Wrote: ------------------------------------------------------- > I object to a thread in which we all raise > interesting questions that relate to the analysis > of financial statements. Some of you are guilty > of giving answers that appear to be both > well-reasoned and well-written. This…is an > outrage. I expect less of us. > > > > Can someone please come in here and advise me on > how to transition, ultimately, to a role as a > hedge fund PM or investment banker? My background > is in food prep (12 years). Thank you. The first thing you need to do is a get a “client facing role” at a restaurant popular with PM’s and IB’s. When a group of suspected PM’s or IB’s come in, make sure they are at one of your tables and ask them which is better, CFA or MBA. I suspect they will be so taken with your obvious love of business and finance that they will be fighting over which one gets credit for finding you.
bchadwick Wrote: ------------------------------------------------------- > Glad to see you back, QJ. > > Yahoo can also give you industry multiples if you > don’t have a BBG subscription, though I’ve often > wondered how it goes about classifying > industries. > > Presumably multiples expand and contract over the > business cycle because the near term cash flows > are more valuable than the far term cash flows, > and the value of those will fluctuate over the > business cylce. Then the next question is how > sentiment affects the multiples. With that, I > don’t see how you can do much other than look at > long term averages. Possibly if you are clever > enough, you can have some kind of demographic > model that looks at the demand for cash vs risky > instruments and as the demand for cash goes up > (say for retirement expenses) then the risk > premiums go up and that will lower multiples over > time. Do you have a yahoo link for EV/Rev and EV/EBITDA comps? I see the public company multiples such as P/B and P/E but I’m looking for multiples suitable for private transactions. I have no problem hopping on Bberg for the info. This may be an instant message help request since I did not find this information quickly the other day. Overall calculating forward multiples seems a bit make-believe. Damodaran cautions it but provides guidance (which is to leave EV as current when forecasting).
Sorry, I was thinking you were asking about how to identify comparables. I’m not sure where or if Yahoo has EV calcs. I just thought you could look to see what Yahoo shows as comparable companies, and then you’d have to do a quick and dirty calc on EBITDA and EV.
I’ll check out Bberg. I have specific comps that I’m working with, but I would like a benchmark comparison. Thanks bchad!