Key Rule 2

Question 1

Key rule 2:
Which metrics and multiples do you use?

Answer 1

Dependent on industry and what stage of growth company is in
- generally use a revenue multiple, to measure value relative to net sales
- also use profitability multiple to assess value relative to profits.

Question 2

P/E =

Answer 2

Price per share/ EPS
Or
Equity value/ Net income

Question 3

EBIT =

Answer 3

Company’s operating income from its IS, includes DnA and perhaps other non-cash charges

Question 4

Unlevered free cash flow (free cash flow to firm)

Answer 4

EBIT x (1-tax rate) + non-cash charges - change in operating assets and liabilities - CapEx

Question 5

Levered Free Cash Flow (Free Cash Flow to Equity) =

Answer 5

Net income + non-cash charges - change in operating assets and liabilities - CapEx - mandatory Debt repayments

Question 6

Enterprise value/ EBIT
- used for?
- what does it mean?

Answer 6

• used for many, mostly where CapEx is more important to factor in, since DnA follows CapEx closely
• rough approx of how valuable a company is relative to its income from business operations

Question 7

Enterprise Value/ EBITDA
- used for?
- what does it mean?

Answer 7

• used for many, most useful where CapEx and D&A not as important, as it excludes both
• rough approx of how valuable a company is relative to its operational cash flow

Question 8

P/E
- used for?
- what does it mean?

Answer 8

• used for many, most relevant for banks and financial institutions, distorted by non-cash charges, capital structure and tax rates
• rough measure of how valuable a company is in proportion to its after-tax earnings

Question 9

EV / Levered FCF
- used for?
- what does it mean?

Answer 9

• not very common as it requires lot of work to calculate and may produce wildly different numbers depending on the capital structure
• most accurate measure of a company’s true cash flow and how valuable it is relative to that.

Question 10

Enterprise Value/ Unlevered FCF
- used for?
- what does it mean?

Answer 10

• used when CapEx or changes in operational assets and liabilities such as deferred revenue have big impact, also critical in DCFs
• similar, but capital structure neutral, so better for comparing different companies

Question 11

FCF multiples are more accurate than the EBIT and EBITDA multiples, but 2 problems:

Answer 11

• they take more time to calculate, and you have to go through company’s financial statements in detail
• may not be standardised, because companies include very different items in the CFO
  Thats why EBIT and EBITDA multiples tend to be more common: convenience and comparability

Question 12

Are book value multiples any good?

Answer 12

• how valuable a company is relative to its BS
• have become less relevant over time as most company’s EV are vastly different from SE on their BS due to companies over time becoming more service-oriented and intellectuals property oriented.