Question

Below are two industry average valuation multiples. You wish to estimate the value for company X based on the industry average. You know that company X has significantly different capital structure than other firms in the same industry.

Industry Averages
EBITDA multiple	3.5x
P/E multiple	8.0x

Which multiple would be most suitable to use to estimate company X's value relative to companies in the same industry? Briefly explain.

Answer 1

If you wish to estimate the value for company X based on the industry average, EBITDA multiple would be most suitable for valuing the company as there is significant difference in capital structure. Capital structure is the level of debt and equity capital. Due to different capital structure there would be different debt cost and tax expense as debt cost is tax deductible. EBITDA multiple is useful to eliminate debt costs, taxes, depreciation, and amortization and gives much clearer picture than P/E. So in case of difference in capital structure then EBTDA would help us to know how is the operating efficiency of the company and it is more suitable valuation multiple compared to P/E.