EV/EBITDA vs EV/EBIT vs P/FCF

[Guest valueInv]

Interesting article:

 

http://valueandopportunity.com/2013/11/07/pe-evebitda-evebit-pfcf-when-to-use-what/

 

Agree? Disagree?

Why do we see P/FCF used so little?

Why is EV/EBITDA so popular despite its shortcomings?

[Packer16]

I think you can use all three in addition to P/FCF you just need to understand the advantages and disadvantages of each.  I rarely use P/E as the E has alot of noise in it.  FCF can be lumpy so I calculate assuming "normalized assumptions".  I also use EV/FCF (Enterprise) - a Graham favorite that not many folks use today.

 

EV/EBITDA is used because it provides the lowest number but also allows you to compare firms using different accounting and tax conventions across countries.

 

Packer

[racemize]

I would suspect that many people use P/FCF or P/OE (owner earnings) on the board.  Or some kind of normalized amount of FCF/OE as Packer just said.

 

 

Packer, with respect to EV/FCF - that seems somewhat strange since the debt is "paid for", but you are still subtracting interest payments.  What is the rationale behind it?

[matjone]

When did Graham talk about cash flow?  I thought he just talked about earnings.  Maybe I need to re-read some stuff

[Hielko]

I would suspect that many people use P/FCF or P/OE (owner earnings) on the board.  Or some kind of normalized amount of FCF/OE as Packer just said.

 

 

Packer, with respect to EV/FCF - that seems somewhat strange since the debt is "paid for", but you are still subtracting interest payments.  What is the rationale behind it?

FCF isn't by definition a metric that applies to only the equity, you can also calculate FCF to the whole firm (so without subtracting interest payments).

[racemize]

I would suspect that many people use P/FCF or P/OE (owner earnings) on the board.  Or some kind of normalized amount of FCF/OE as Packer just said.

 

 

Packer, with respect to EV/FCF - that seems somewhat strange since the debt is "paid for", but you are still subtracting interest payments.  What is the rationale behind it?

FCF isn't by definition a metric that applies to only the equity, you can also calculate FCF to the whole firm (so without subtracting interest payments).

 

I see, so EV/FCF could be calculated as:

 

EV / (EBITDA - maintenance capex)

 

 

I guess the issue with EV/FCF (and the above) if you don't include interest payments is that the taxes will necessarily change.  So do you also pull out the taxes, right?

[Packer16]

I calculate EV FCF as equity cash flows plus interest payments.  I leave the tax shield and the changes in WC in the calculation.

 

Packer

[SharperDingaan]

Multiple of EBITDA, as we're typically buying into a cyclical. Usually up to 5% over the odds for quality, & in the bottom end of the multiple range; sell at around 90% of the upper end of the multiple range. If we think that this time it may be different; we may keep some upside exposure via call options.

 

Multiples, & their trends (usually technology driven), are pretty consistent across multiple cycles; even though they might not apply exactly to the current cycle. So ..... circle of competence, & industry/company familiarity (Gladwell 10,000 hour rule), has significant value here.

 

We're also happy to capture < 50% of the investment thesis, especially if the typical cycle is fairly short (2-4 years). If we like the firm; over a 10 year period we can expect around 3 complete cycles, & we will be coining on both the up & down legs of each cycle ... as well as compounding all along the way. We don't need to be greedy.

 

Different approach, but it seems to work fairly well.

 

SD

 

 

 

 

[Palantir]

I use FCF/EV.

[ageofsocrates]

there's no single metric. One problem of the p/fcf as highlighted previously by packer16  is the growth component.

 

Companies that are cheap may not be good investments. At one point, for-profit education companies were trading at extremely low p/fcf valuations.  However, some of 2nd/3rd tier companies were in terminal decline and could not sustain the growth that they had experienced before.  They were generating strong FCF but at unsustainable rate.

 

EV/EBITDA allows one in a way to identify cheap companies that may have a growth component. However, it's one of many financial metrics that a value investor will need to look at before deciding whether a stock is a suitable investment.

 

my 2 cents.

[Guest valueInv]

EV/EBITDA is used because it provides the lowest number but also allows you to compare firms using different accounting and tax conventions across countries.

 

Packer

 

Thanks.

 

Does anybody know what is the historical average for this metric for the S & P 500?