Enterprise Value to Sales and Other Enterprise Value Multiples

Beyond EBITDA, there are other choices. Enterprise value is theoretically a better multiple of free cash flow to the firm (FCFF) than to EBITDA anyway, so does anyone use that? Yes. Just not as much.

There are other choices as well, and each measure can be calculated by starting with net income. Given that each should relate to enterprise value, what do you think should definitely be added back to each one?

No, that's not important. The measures could be pre-tax or after tax.

Exactly! It's not just an equity thing here; it's the whole enterprise. Any measure should include money left for both bondholders and stockholders. So each one starts with net income and then adds back interest expense.

No. This is only done for some, but there's no real reason to single out depreciation expense in a measure relating to the whole firm.

From there, paths diverge. Here are the most popular. * __EBIT__: Net income plus interest expense and tax expense. * __EBITA__: EBIT plus amortization expense. * __EBITDA__: EBITA plus depreciation expense. * __FCFF__: Net income plus interest expense, depreciation, and amortization, minus tax savings on interest, and investments in both working capital and fixed capital. * __Sales__: You know ... just sales. Or net income plus everything that was subtracted from sales. What's the only one on this list which appears to be an after-tax measure?

No. Sales is before anything is deducted, including taxes.

Yes! Free cash flow to the firm is different in this way. It attempts to isolate the cash which is really available to investors at the end of the period. There are reasons behind each one, and any can be used as a multiple for comparison. Obviously inclusion or exclusion of any of the items which make the difference between these measures will work better in some cases and worse in others.

No. The "B" and "T" in EBITDA mean "before taxes."

The EV/Sales ratio deserves a special mention. It's probably the most widely used multiple for enterprise value behind EBITDA. If you think of the enterprise value to sales (EV/S) ratio compared to the price to sales (P/S) ratio, how might you justify EV/S as being a little more reasonable in matching values?

Not quite. Price does respond to capital structure, as stockholders assess varying risk levels.

That's right! The P/S ratio asks what stockholders pay for each unit of sales, but the sales don't belong to them. Sales belong to the enterprise, and more debt means a larger claim on those sales. But the EV/S ratio matches firm value with firm sales. Apples to apples comparisons are always better.

No, it is. The enterprise value should be calculated with all market values if possible.

To summarize: [[summary]]

Tax expense

Interest expense

Depreciation expense

Sales

FCFF

EBITDA

EV is not a market value

Some sales belong to debtholders

Price isn't affected by capital structure like enterprise value

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