EV Multiples vs. Equity Multiples
Every multiple pairs a value with a metric. The cardinal rule: the metric and the value must belong to the same investors.
- ✓List the common EV and equity multiples
- ✓Apply the matching principle to pick the right denominator
- ✓Explain why EV/EBITDA is the workhorse multiple
A multiple is just a value divided by a financial metric - a way to compare companies of different sizes on the same footing. The trap is mismatching the two halves.
If a metric is measured before interest expense (it belongs to all investors), pair it with enterprise value. If it's after interest (it belongs to equity only), pair it with equity value.
- › / Revenue
- › / ← the workhorse
- › /
- ›Numerators are pre-interest: value to all capital
- ›P / E (price to earnings)
- ›PEG (P/E to growth)
- ›P / B (price to book)
- ›Metrics are post-interest: value to equity only
EV/EBITDA is the most used multiple in practice. strips out capital structure (interest), taxes, and non-cash , so it compares the raw operating engine across companies with very different financing and asset bases. P/E, by contrast, is after interest and taxes - so it's an equity metric and is distorted by how levered a company is.
- •An analyst computes ' / Net Income'.
- •Is that a valid multiple?
- 1.Net income is AFTER interestIt belongs to equity holders only.
- 2. belongs to ALL investorsNumerator and denominator don't match.
Invalid. Net income should pair with (that's P/E). Pair with a pre-interest metric like or .
Which pairing respects the matching principle?