A Superior Valuation Metric: Enterprise Value (EV) to EBITDA

[kelvesy]

I searched the forum for any valuation thread and chanced upon this.

Personally, I do not think EV/EBITDA is useful especially when you are investing in a capex-intensive company.

Look at some airline companies, their depreciation is high and the fleet gets purchases every now and then. If the airlines are using accelerated depreciation approach, depreciation is real costs as it needs to be replaced.

See this link: https://www.oldschoolvalue.com/blog/inve...an-ebitda/

When approaching stocks using discounted earnings model, there are many investors who use different number of discounted years. Some use 10 years, some use 15 years, others use 20 years. With a wide range of years being used, the intrinsic value tends to be skewed towards the investor's liking. "fit into a box" mentality. This model is highly dependent on [1] risk-free rate [2] growth rates [3] earnings per share or free cash flow per share? What if it is wrong? Is perpetual value something to consider since corporate lifespan is getting shorter as well? Garbage in and garbage out.

Anyone struggled with this?

How about P/E? P/E does not consider the cash and debt levels of a company.

So far, what I like is EV/EBIT in comparison with Return on Equity to see the amount I am paying for the 'quality' of management performance. All in all, I guess a combination works and you have to apply your gut feel for it.

Open to discuss so that we can understand valuation better.

[TTTI]

I searched the forum for any valuation thread and chanced upon this.

Personally, I do not think EV/EBITDA is useful especially when you are investing in a capex-intensive company.

Look at some airline companies, their depreciation is high and the fleet gets purchases every now and then. If the airlines are using accelerated depreciation approach, depreciation is real costs as it needs to be replaced.

See this link: https://www.oldschoolvalue.com/blog/inve...an-ebitda/

When approaching stocks using discounted earnings model, there are many investors who use different number of discounted years. Some use 10 years, some use 15 years, others use 20 years. With a wide range of years being used, the intrinsic value tends to be skewed towards the investor's liking. "fit into a box" mentality. This model is highly dependent on [1] risk-free rate [2] growth rates [3] earnings per share or free cash flow per share? What if it is wrong? Is perpetual value something to consider since corporate lifespan is getting shorter as well? Garbage in and garbage out.

Anyone struggled with this?

How about P/E? P/E does not consider the cash and debt levels of a company.

So far, what I like is EV/EBIT in comparison with Return on Equity to see the amount I am paying for the 'quality' of management performance. All in all, I guess a combination works and you have to apply your gut feel for it.

Open to discuss so that we can understand valuation better.

"How about P/E? P/E does not consider the cash and debt levels of a company."

Yup. PE is also retrospective, so unless one considers that the earnings are stable and unlikely to change, otherwise PE can be wildly inaccurate.

EV/EBIT, ROE figures are all good, but I'm surprised that in this thread dating back to 2015, nobody has mentioned about CFs and their related metrics.
Stuff like FCFs.

The present value of the business is the summation of all it's future cashflows, discounted at an appropriate rate.

Anyone who has run a small business or better yet, a start up before, would understand the painful realities of CFs.

[weijian]

"How about P/E? P/E does not consider the cash and debt levels of a company."

Yup. PE is also retrospective, so unless one considers that the earnings are stable and unlikely to change, otherwise PE can be wildly inaccurate.

EV/EBIT, ROE figures are all good, but I'm surprised that in this thread dating back to 2015, nobody has mentioned about CFs and their related metrics.
Stuff like FCFs.

The present value of the business is the summation of all it's future cashflows, discounted at an appropriate rate.

Anyone who has run a small business or better yet, a start up before, would understand the painful realities of CFs.

There has been more than enough talk on FCF/DCF. Just a quick search and yielded a few more relevant ones:

https://www.valuebuddies.com/thread-2182.html
https://www.valuebuddies.com/thread-6357.html
https://www.valuebuddies.com/thread-6124.html

[donmihaihai]

I see where you're coming from. IMHO though, its not an entirely fair comparison, because his NAV reflects a lot of things (not just stocks), whereas the S & P 500 is made up of liquid securities, which make explain price volatility.

Of course it really depends on whether you think price volatility is actually risk too haha. Buffett would probably say its a meaningless discussion. And he's said that NAV is an approximation, but doesn't fully reflect the intrinsic value of Berkshire.

It is by no mean a perfect comparison, but close enough to conclude and learn from it, IMO.

IIRC, Mr. Buffett has said in the shareholder letter, "gap between Berkshire’s intrinsic value and its book value has materially widened". It means NAV is much lower than the deserved intrinsic value. So the conclusion made has a very large MOS  

Anyway, thanks for the chat, I enjoy it

You're welcome. Just to drag this conversation on a bit more as I've encountered a practical problem related to this in Global Investments, a close ended fund. P/NAV is only 0.62, which makes no sense to me, considering that most of their assets are actually liquid assets.

And yet, if we judge the performance, we are going to look at the price (beta).

So what should we use?

The book value? Because thats what Buffett would say, and that makes sense intrinsically because if we liquidate today, we get our NAV right away (or become an open ended fund). If thats the case, this is a screaming buy. Its like paying 60 cents for a dollar, without there being anything wrong with the dollar in the first place. 

And because the NAV reflects the price of marketable securities.

Apologizes if I seem to be going in a loop here lol.

Either a Gold pot or trap. 
What was the close fund performance?
What do you think of the future performance
Any idea on the valuation of those mark to market securities it is holding? 
If it close the valuation GAP in 5 yrs, will you still make enough return?

If above are answered. Valuation of the closed end fund is really the easy part

[kelvesy]

"How about P/E? P/E does not consider the cash and debt levels of a company."

Yup. PE is also retrospective, so unless one considers that the earnings are stable and unlikely to change, otherwise PE can be wildly inaccurate.

EV/EBIT, ROE figures are all good, but I'm surprised that in this thread dating back to 2015, nobody has mentioned about CFs and their related metrics.
Stuff like FCFs.

The present value of the business is the summation of all it's future cashflows, discounted at an appropriate rate.

Anyone who has run a small business or better yet, a start up before, would understand the painful realities of CFs.

P/E could be distorted by one-off non-cash expenses or differing depreciation policies of companies.

So far, what is the valuation method that everyone is using?