FNCE30011 · Essentials Of Corporate Valuation
Valuation using Other Multiples
PE is an equity multiple struck after interest and tax, so it is distorted by leverage and the tax position. Enterprise multiples fix part of this by putting enterprise value V over a pre-interest earnings base, letting you compare firms with different capital structures. Climb the ladder to where the comparators are genuinely like-with-like: EV/EBIT works at the operating level and kills interest, though the interest tax shield still leaks (V carries the shield, so the multiple rises a little with leverage — the clean version is U/EBIT, on unlevered value); EV/EBITDA adds back depreciation and amortisation, neutralising different depreciation policies but not capex intensity; and EV/(EBITDA−CAPEX) also nets capital expenditure, restoring like-with-like when firms differ mainly in how capital-hungry they are. The governing exam point is the matching discipline: pick the multiple at the level where the comparators truly match, and pair an equity numerator with equity earnings and an enterprise numerator with a pre-interest base. After applying an enterprise multiple you still run the bridge — add surplus cash, subtract net debt — to land on equity.
What this chapter covers
- 018.1 Why PE is leverage- and tax-distorted; the case for enterprise multiples
- 028.2 EV/EBIT at the operating level — and the ITS leak (clean version U/EBIT)
- 038.3 EV/EBITDA — neutralising depreciation, but not capex
- 048.4 EV/(EBITDA−CAPEX) — restoring like-with-like under different capital intensity
- 058.5 The ladder: pick the multiple where comparators are genuinely like-with-like
- 068.6 Matching numerators to bases, then bridging the enterprise value to equity
Worked example: value off a comparator's EV/EBITDA
- +1Identify. EV/EBITDA is an enterprise multiple — apply it to the pre-interest base (EBITDA) to get enterprise value, then bridge to equity.
- +1Apply the multiple. EV = 8.0 × 150 = $1,200m.
- +1Bridge. Equity = EV + surplus cash − gross debt = 1,200 + 90 − 400 = $890m (equivalently EV − net debt, net debt = 400 − 90 = 310).
- +1Check like-with-like. EV/EBITDA neutralises leverage and depreciation policy but not capex; if the firms differ sharply in capital intensity, climb to EV/(EBITDA−CAPEX) instead.
Key terms
- Enterprise multiple
- Enterprise value over a pre-interest earnings base (EBIT, EBITDA, EBITDA−CAPEX). Because the numerator and denominator both sit before interest, it compares firms with different leverage — unlike PE.
- EV/EBIT
- An operating-level multiple that kills interest, but the interest tax shield still leaks (enterprise value carries the shield), so it rises slightly with leverage. The clean version is U/EBIT, using unlevered value.
- EV/EBITDA
- Adds depreciation and amortisation back to the base, neutralising different depreciation policies — but not differences in capex or maintenance intensity.
- EV/(EBITDA−CAPEX)
- Nets capital expenditure from the base, restoring like-with-like when firms differ mainly in capital intensity — the rung to climb to when capex policies diverge.
- The multiples ladder
- The principle of choosing the multiple at the level where comparators are genuinely like-with-like, matching an equity numerator to equity earnings and an enterprise numerator to a pre-interest base.
Valuation using Other Multiples FAQ
Why use an enterprise multiple instead of PE?
PE is computed after interest and after tax, so two firms with the same operations but different debt trade on different PEs — the multiple is contaminated by capital structure. Enterprise multiples put enterprise value over a pre-interest base (EBIT, EBITDA), so the comparison is independent of how the firms are financed. That makes them the right tool when the comparators' leverage differs from the target's.
If EV/EBIT already kills interest, why does it still rise with leverage?
Because enterprise value itself carries the interest tax shield — a more-levered firm's EV is inflated by the present value of its tax shields. So EV/EBIT leaks a little of the leverage effect even though EBIT is pre-interest. The fully clean version is U/EBIT, using unlevered value U (which excludes the shield). For most exam purposes EV/EBIT is acceptable, but knowing the leak exists is a conceptual mark.
When should I climb from EV/EBITDA to EV/(EBITDA−CAPEX)?
When the comparators differ mainly in capital intensity. EV/EBITDA adds back depreciation, so it neutralises different depreciation policies — but it ignores how much cash each firm must reinvest in capex to sustain that EBITDA. A capital-hungry firm and an asset-light one can show the same EBITDA but very different free cash flow. Netting capex (EBITDA−CAPEX) restores the like-with-like comparison.
Do I still need the bridge after applying an enterprise multiple?
Yes. An enterprise multiple gives you enterprise value — the value of operations to all investors. To reach equity you still add surplus assets and subtract net debt (and minorities), then divide by shares. Forgetting the bridge and quoting enterprise value as if it were equity is a common slip; the multiple does the comparison, the bridge does the conversion.
Exam move
Memorise the ladder and what each rung neutralises: EV/EBIT (kills interest, ITS leaks), EV/EBITDA (also kills depreciation policy), EV/(EBITDA−CAPEX) (also kills capex intensity). The exam point is choosing the rung where the comparators are genuinely like-with-like, so practise reading what differs between target and comparator and picking accordingly. Keep the matching rule on your A4 — equity numerator with equity earnings, enterprise numerator with a pre-interest base — and never forget the bridge after an enterprise multiple: add surplus cash, subtract net debt, then divide by shares to reach equity.
