How to calculate share price using Discounted Cash Flow (DCF) / EBITDA?
1 Answer(s)
Binny
#1 - EBITDA is the most commonly used metric to calculate terminal value since other metrics like sales and earnings may not be best suited for comparative purposes.
For obvious reasons the sales multiple doesn't make much sense since health of a company is also determined by its cost structure not just its revenue.
Earnings is a slightly better metric than sales, but still not the best, since when you are using a P/E multiple of other comparabales it is factoring in stuff like interest expense, tax impact etc. Interest and Tax are not directly relevant to the operations of the company and hence using a P/E multiple removes the 100% focus on the business operations.
The EBITDA multiple is the only one that is 100% focused on the companys operations.
Dec 27 2012 11:51 AM
For obvious reasons the sales multiple doesn't make much sense since health of a company is also determined by its cost structure not just its revenue.
Earnings is a slightly better metric than sales, but still not the best, since when you are using a P/E multiple of other comparabales it is factoring in stuff like interest expense, tax impact etc. Interest and Tax are not directly relevant to the operations of the company and hence using a P/E multiple removes the 100% focus on the business operations.
The EBITDA multiple is the only one that is 100% focused on the companys operations.