Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
P/E or Enterprise Value/EBITA of a stock
Hi Everybody,

I know that the most common ratio that investors use is the Price/Earnings TTM, Forward P/E, and 5 year P/E range.  But I have heard that it is better to use the Enterprise Value (sum of company's market cap + its debt and preferred stock minus cash and cash equivalents) / Earnings before Interest, taxes, depreciation and amortization.  I have been able to find the 10 year EV/EBITA ratio on Gurufocus but don't know how reliable the website is.  I am able to do my screening through Finviz and my fundamental analysis through Morningstar Premium through my library but I don't think they have much in regards to EV/EBITA or EV/Revenues.  Let's look at a couple of stocks below:

Let's look at Minnesota Mineral and Mining (MMM) for example:

The TTM P/E is 23.68, Forward P/E 20.1 and 5 year range of 13.62-23.71.

The EV/EBITA is 15.12, and 10 year range is 5.7 to 15.5. 

It looks like either way you look at it for MMM, it is near the high end of its range for P/E and EV/EBITA.

However, if you look at Unilever (UL) the P/E looks high but the EV/EBITA looks near its low during last 10 years.

The TTM P/E is 25.56, Forward P/E 19.9, and 5 year range of 15.64 to 25.64

The EV/EBITA is 8.1, and 10 year range of 5.6 to 17.2

Anyone know any good sites or use Gurufocus at all?  Thanks
Hi, Ryan. EBITDA is useful for something, but I would say that more investors are using P/E and many other metrics (dividend yield %, P/B, ROIC, etc) as opposed to EBITDA. EBITDA can be insightful if you are comparing the operating earnings of two companies in the same industry so you can compare vs. a benchmark or industry standard. But, EBITDA has many limitations. EBITDA is not actual earnings, because you are intentionally excluding the cost of doing business.
EV and EVBITA both start with market capitalization and modify it from there. It does not take into account whether the company's stock has been bid up to an unsustainable level because of speculation, M&A rumors etc. Neither does it address a company whose stock has been marked down due to short-term issues, in sympathy with another company in the same sector or just by being ignored by the market. Admittedly, the second instance is more advantageous than the former.

However, Enterprise Value has nothing to do with the earnings power of the company nor what is has done in the past. I know everyone says what was done in the past is irrelevant but I disagree. If a company repeatedly underperforms the profit margins (gross, net or operating) it was able to achieve 5 to 10 or more years ago, then perhaps the expectations of the price you pay today should be tempered with the changes the company or its market has undergone.

Ben Graham and Chuck Carnevale on SA have both discussed valuation based on a company's earnings ability. Chuck has done a little research into the past which he had talked about in an article several years ago. Roughly, according to Chuck IIRC, companies who are able to consistently grow earnings less than 15% annually have historically been valued at a P/E of around 15, 15-30% increases in earnings deserve a P/E close to its earnings growth rate and above 30% the PEG (P/E to Growth) ratio should be used. (Note: anyone is free to correct me here since I'm too lazy to rummage through thousands  of Chuck's posts on SA.) Because of that, I prefer to use P/E along with several other metrics to value a company I am interested in.

EV may be a good indicator of valuing a takeover bid for a company or its attractiveness as a takeover or merger candidate. To me, it's not a good metric to determine its suitability as a long-term investment, especially dividend growth companies I am interested in.
How do they get the deer to cross at that yellow road sign?


Users browsing this thread: 1 Guest(s)