🪄EBITDA & P/E Ratio Simplified!!🔮

📌EBITDA-

The first multiple is the ‘Enterprise Value to EBITDA multiple’

The advantage of using the EBITDA (Earnings before Interest, Tax, Depreciation and Amortisations) in the place of PAT is that EBITDA is a measure of operational efficiency. Therefore, higher the EBITDA, higher would be the return on investment (ROI) and hence the efficiency of the capital in business. Companies are given higher EBITDA multiples in valuation looking at the above factors. Secondly, in companies where the EBITDA is positive but the profit after tax (PAT) is negative (due to high interest, depreciation and amortisation burden), this multiple provides a better measure of value. This can happen in the case of businesses with long gestation to break-even and profits such as in start-up companies in growth phase or asset heavy businesses.

we can arrive at the EV/EBITDA multiple of the company –

Enterprise Value of the Company = INR 26,737.79 lakh

If the estimated EBITDA for Y1 = INR 1875 lakh

EV to EBITDA multiple = 26737.79 / 1875 =

14.26

📌Price to Earnings Multiple

This multiple is used extensively in determining the market valuation of stocks in listed companies as the price used in this metric is the current market price of the share of a company. Therefore, the P/E multiple is a very useful market metric to gauge the value of a company as a multiple of its current earning capacity. It can also be used sometimes tocompare unlisted companies in alternative space to their listed peers to know the range at which they are being valued. Example:

Alpha Ltd has an after tax profit of INR 100 lakhs and a paid up capital of INR 200 lakhs divided into 20 lakhs shares of INR 10 each. It currently trades at a P/E multiple of 32. What is the current market price of the share?

Earnings Per Share (EPS) of the company = 10,000,000 / 2,000,000 = INR 5

Price-Earnings (P/E) ratio = 32

Current Market Price (CMP) = 32 x 5 = INR 160 per share

A few more variations that can be used in the multiple based valuation approach are the PAT multiple (Value of Firm / PAT) and the Earnings before interest and Tax (EBIT) multiple (Value of Firm /EBIT).

In early stage companies and certain other technology or service based companies, non-financial multiples may also be used. In e-commerce, the GMV multiple (gross merchandise value) is used. In telecom the ARPU (average revenue per user) is used. In the hotel industry, the ARR (average room revenue) is used sometimes. Multiples approach is very useful to validate the valuation arrived at by a different approach as it can easily be compared against peer companies both in the listed and unlisted categories as well as to industry benchmarks.