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CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches

Compared with P/E, an analyst who prefers enterprise value to EBITDA (EV/EBITDA) when comparing firms with very different leverage is most likely motivated by the fact that EV/EBITDA:

EV/EBITDA compares total firm value, debt plus equity, with earnings before interest, so it is less distorted by differences in capital structure than P/E. It does not always give lower multiples and does not remove differences in growth.

  1. AIs unaffected by differences in capital structure to a greater degreeCorrect
  2. BAlways produces lower multiples than P/E
  3. CRemoves the effect of differences in revenue growth

Explanation

EV captures both debt and equity and EBITDA is before interest, so the ratio is less affected by financial leverage than P/E. It does not always yield lower multiples, and it does not remove growth differences.

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