Value/EBITDA Multiple l The Classic Definition
Value Market Value of Equity + Market Value of Debt = EBITDA Earnings before Interest, Taxes and Depreciation
l
The No-Cash Version
Value Market Value of Equity + Market Value of Debt - Cash = EBITDA Earnings before Interest, Taxes and Depreciation - Interest Income
Reasons for Increased Use
1. The multiple can be computed even for firms that are reporting net losses, since earnings before interest, taxes and depreciation are usually positive. 2. For firms in certain industries, such as cellular, which require a substantial investment in infrastructure and long gestation periods, this multiple seems to be more appropriate than the price/earnings ratio. 3. In leveraged buyouts, where the key factor is cash generated by the firm prior to all discretionary expenditures, the EBITDA is the measure of cash flows from operations that can be used to support debt payment at least in the short term. 4. By looking at cashflows prior to capital expenditures, it may provide a better estimate of “optimal value”, especially if the capital expenditures are unwise or earn substandard returns. 5. By looking at the value of the firm and cashflows to the firm it allows for comparisons across firms with different financial leverage.
Value/EBITDA Multiples: September 1997
Value/EBITDA Multiples: September 1997
600 500 400 300 200 100 0 Std. Dev = 14.65 Mean = 12 N = 3820.00
VEBITDA
The Determinants of Value/EBITDA Multiples: Linkage to DCF Valuation l Firm value can be written as:
FCFF1 V0 = WACC - g l The numerator can be written as follows:
FCFF = EBIT (1-t) - (Cex - Depr) - ∆ Working Capital = (EBITDA - Depr) (1-t) - (Cex - Depr) - ∆ Working Capital = EBITDA (1-t) + Depr (t) - Cex - ∆ Working Capital
From Firm Value to EBITDA Multiples l Now the Value of the firm can be rewritten as,
Value = EBITDA (1- t) + Depr (t) - Cex - ∆ Working Capital WACC - g
l
Dividing both sides of the equation by EBITDA,
Value ∆ Working Capital/EBITDA (1- t) Depr (t)/EBITDA CEx/EBITDA = + EBITDA WACC - g WACC -g WACC -g WACC - g
A Simple Example l Consider a firm with the following characteristics:
– – – – – – – Tax Rate = 36% Capital Expenditures/EBITDA = 30% Deprecition/EBITDA = 20% Cost of Capital = 10% The firm has no working capital requirements The firm is in stable growth and is expected to grow 5% a year forever. Note that the return on capital implied in this growth rate can be calculated as follows: g = ROC * Reinvestment Rate .05 = ROC * Net Cap Ex/EBIT (1-t) = ROC * (.30-.20)/[(1-.2)(1-.36)] Solving for ROC, ROC = 25.60%
Calculating Value/EBITDA Multiple l In this case, the Value/EBITDA multiple for this firm can be estimated as follows:
(1- .36) .10 - .05 + (0.2)(1 - .36) 0.3 0 = 8.24 .10 - .05 .10 - .05 .10 - .05
Value = EBITDA
Value/EBITDA Multiples and Taxes
VEBITDA Multiples and Tax Rates
16
14
12
10
Value/EBITDA
8
6
4
2
0 0% 10% 20% Tax Rate 30% 40% 50%
Value/EBITDA and Net Cap Ex
Value/EBITDA and Net Cap Ex Ratios
12
10
8
Value/EBITDA
6
4
2
0 0% 5% 10% 15% Net Cap Ex/EBITDA 20% 25% 30%
Value/EBITDA Multiples and Return on Capital
Value/EBITDA and Return on Capital
12
10
8
Value/EBITDA
6
WACC=10% WACC=9% WACC=8%
4
2
0 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Return on Capital
Value/EBITDA Multiple: Trucking Companies
Company Name KLLM Trans. Svcs. Ryder System Rollins Truck Leasing Cannon Express Inc. Hunt (J.B.) Yellow Corp. Roadway Express Marten Transport Ltd. Kenan Transport Co. M.S. Carriers Old Dominion Freight Trimac Ltd Matlack Systems XTRA Corp. Covenant Transport Inc Builders Transport Werner Enterprises Landstar Sys. AMERCO USA Truck Frozen Food Express Arnold Inds. Greyhound Lines Inc. USFreightways Golden Eagle Group Inc. Arkansas Best Airlease Ltd. Celadon Group Amer. Freightways Transfinancial Holdings Vitran Corp. 'A' Interpool Inc. Intrenet Inc. Swift Transportation Landair Services CNF Transportation Budget Group Inc Caliber System Knight Transportation Inc Heartland Express Greyhound CDA Transn Corp Mark VII Coach USA Inc US 1 Inds Inc. Average Value $ 114.32 $ 5,158.04 $ 1,368.35 $ 83.57 $ 982.67 $ 931.47 $ 554.96 $ 116.93 $ 67.66 $ 344.93 $ 170.42 $ 661.18 $ 112.42 $ 1,708.57 $ 259.16 $ 221.09 $ 844.39 $ 422.79 $ 1,632.30 $ 141.77 $ 164.17 $ 472.27 $ 437.71 $ 983.86 $ 12.50 $ 578.78 $ 73.64 $ 182.30 $ 716.15 $ 56.92 $ 140.68 $ 1,002.20 $ 70.23 $ 835.58 $ 212.95 $ 2,700.69 $ 1,247.30 $ 2,514.99 $ 269.01 $ 727.50 $ 83.25 $ 160.45 $ 678.38 $ 5.60 EBITDA Value/EBITDA $ 48.81 2.34 $ 1,838.26 2.81 $ 447.67 3.06 $ 27.05 3.09 $ 310.22 3.17 $ 292.82 3.18 $ 169.38 3.28 $ 35.62 3.28 $ 19.44 3.48 $ 97.85 3.53 $ 45.13 3.78 $ 174.28 3.79 $ 28.94 3.88 $ 427.30 4.00 $ 64.35 4.03 $ 51.44 4.30 $ 196.15 4.30 $ 95.20 4.44 $ 345.78 4.72 $ 29.93 4.74 $ 34.10 4.81 $ 96.88 4.87 $ 89.61 4.88 $ 198.91 4.95 $ 2.33 5.37 $ 107.15 5.40 $ 13.48 5.46 $ 32.72 5.57 $ 120.94 5.92 $ 8.79 6.47 $ 21.51 6.54 $ 151.18 6.63 $ 10.38 6.77 $ 121.34 6.89 $ 30.38 7.01 $ 366.99 7.36 $ 166.71 7.48 $ 333.13 7.55 $ 28.20 9.54 $ 64.62 11.26 $ 6.99 11.91 $ 12.96 12.38 $ 51.76 13.11 $ (0.17) NA 5.61
A Test on EBITDA l Ryder System looks very cheap on a Value/EBITDA multiple basis, relative to the rest of the sector. What explanation (other than misvaluation) might there be for this difference?
Analyzing the Value/EBITDA Multiple l While low value/EBITDA multiples may be a symptom of undervaluation, a few questions need to be answered:
– Is the operating income next year expected to be significantly lower than the EBITDA for the most recent period? (Price may have dropped) – Does the firm have significant capital expenditures coming up? (In the trucking business, the life of the trucking fleet would be a good indicator) – Does the firm have a much higher cost of capital than other firms in the sector? – Does the firm face a much higher tax rate than other firms in the sector?
Value/EBITDA Multiples: Market l The multiple of value to EBITDA varies widely across firms in the market, depending upon:
– how capital intensive the firm is (high capital intensity firms will tend to have lower value/EBITDA ratios), and how much reinvestment is needed to keep the business going and create growth – how high or low the cost of capital is (higher costs of capital will lead to lower Value/EBITDA multiples) – how high or low expected growth is in the sector (high growth sectors will tend to have higher Value/EBITDA multiples)
U.S. Market: Value/EBITDA Regression
Multiple R .47968 R Square .23009 Adjusted R Square .22890 Standard Error 499.11191 Analysis of Variance Regression Residual F = 192.46490 DF 2 1288 Sum of Squares 95890904.61967 320857161.28121 Signif F = .0000 Mean Square 47945452.30984 249112.70286
------------------ Variables in the Equation -----------------Variable REINV PROJGR (Constant) B -.970608 41.6294 4.949412 SE B .547679 2.1266 .383466 Beta -.043341 .478746 T -1.772 19.576 12.907 Sig T .0766 .0000 .0000 