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EV /
EBITDA
EV / EBIT When depreciation and amortization expenses are small, as in the case of a noncapital-intensive company such as a consulting firm, EV/EBIT and EV/EBITDA will be
similar. Unlike EBITDA, EBIT recognizes that depreciation and amortization, while
non-cash charges, reflect real expenses associated with the utilization and wear of a
firm's assets that will ultimately need to be replaced. EV/EBIT is often in the range of
10.0x to 25.0x.
EV /
Sales
When a company has negative EBITDA, the EV/EBITDA and EV/EBIT multiples will
not be material. In such cases, EV/Sales may be the most appropriate multiple to
use. EV/Sales is commonly used in the valuation of companies whose operating
costs still exceed revenues, as might be the case with nascent Internet firms, for
example. However, revenue is a poor metric by which to compare firms, since two
firms with identical revenues may have wildly different margins. EV/Sales multiples
are often in the range of 1.00x to 3.00x
P/E
P/E is one of the most commonly used valuation metrics, where the numerator is the
price of the stock and the denominator is EPS. Note that the P/E multiple equals the
ratio of equity value to net Income, in which the numerator and denominator are both
are divided by the number of fully diluted shares. EPS figures may be either asreported or adjusted as described below. P/E multiples are often in the range of 15.0x
to 30.0x.
P/E/G
The PEG ratio is simply the P/E ratio divided by the expected EPS growth rate, and is
often in the range of 0.50x to 3.00x. PEG ratios are more flexible than other ratios in
that they allow the expected level of growth to vary across companies, making it
easier to make comparisons between companies in different stages of their life
cycles. There is no standard time frame for measuring expected EPS growth, but
practitioners typically use a long-term, or 5-year, growth rate.
In the spirit of the season of listicles, here are Damodarans 10 rules for
addressing uncertainty in valuations:
1. Less is more. Dont agonize over estimating every last line item as part
of your valuation. Rather, follow the principle of parsimony (otherwise
known asOccams razor), which favors simplicity when it comes to
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