Category Archives: Private Equity

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How would you adjust the EV/EBITDA multiple for rent expense for retail businesses?

Some retail businesses will choose to own their stores, and others will choose to rent. Those who choose to rent will have a lower EBITDA because rent expense reduces EBITDA. We shouldn’t penalize retail companies for their decision to own or lease stores, since we are ultimately valuing the compa...
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What is the cost of equity for a company that trades at 10x P/E?

A proxy for cost of equity is the inverse of price / earnings per share, ie earnings per share / price. You can think of this as the % of return you will get for buying one share, with the return measured as earnings per share. This expected return can be a proxy for the […]...
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Would you rather buy a company with 4x, 5x, and 6x EV/EBITDA multiples for 2019, 2020, and 2021 respectively, or 6x, 5x, and 4x?

We would prefer to buy the company with 6x, 5x, and 4x EV / EBITDA. Since enterprise value is constant, a declining multiple means that EBITDA is growing, since EBITDA in the denominator. EBITDA is declining in the other example, so we would prefer a company with growing EBITDA....
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How do you value a football (soccer) club?

Football (soccer) clubs are typically valued using EV / revenue and comparables analysis. This is because many weaker-performing teams do not make positive EBITDA or net income, so it would be difficult to compare EV / EBITDA or EV / EBIT as widely as you’d like. it’s difficult to do a DCF becau...
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What do you do when you get a negative multiple?

This usually happens when the denominator is negative. For example, for a start-up tech or biotech company, earnings may be negative, so price / earnings would be negative. If EBITDA is negative, then EV / EBITDA would be negative too. Instead of displaying the negative multiple, we replace it with ...
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If two companies have the same historical and projected financials, same management team, same industry, and same strategy, why might one company be trading at 10x EV / EBITDA and the other company at 12x EV / EBITDA?

The company trading at the higher multiple is more valuable likely for qualitative reasons, since the historical and projected financials are the same. For example, the company trading at 12x may have a more diverse customer base and therefore less customer concentration. The company trading at 10x ...
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Which industries place a low importance on comps?

New industries which do not have many comparable companies would place a lower importance on comps. These industries could include many up-and-coming tech companies who are first movers in their sectors and may not have any similar competitors. It would be more appropriate to use a DCF in this case....
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What’s the difference between a capital lease and an operating lease?

A capital lease is like buying the asset with debt. You pay interest and principal repayments. These payments are below EBITDA, meaning they are not treated as operating expenses (OPEX), but rather as costs and outflows related to financing. The asset would be effectively owned, so you will also inc...
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How would you choose your comparable company universe?

First, we would seek to understand the industry by reading through industry research and equity research reports, as well as the annual report / 10k. Competitors are often listed here which could be good comparables. Comparables should have a similar business model and play in similar sectors. Also,...
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If the price of gold is going up, why would P/NAV for gold mining companies be over 1?

The P in the numerator stands for price, or stock price, which is determined by stock market investors. Stock market investors are very quick to react to the price of gold going up, and may buy gold stocks indiscriminately to catch the trend. P represents the equity value of the business based on st...
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