Which multiple is most appropriate for valuing a capital-intensive company with high depreciation?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
EV/EBITDA is most appropriate because it normalizes for differences in capital structure and depreciation policies. High depreciation reduces net income, making P/E less comparable. EBITDA adds back D&A, so it reflects operating performance before the impact of asset base differences. EV/EBITDA is also less affected by leverage. However, for very high capex companies, even EBITDA can be misleading; then consider EV/EBIT or EV/(EBITDA - Maintenance Capex).
WHAT INTERVIEWERS LISTEN FOR
- ✓EV/EBITDA normalizes for D&A differences
- ✓P/E distorted by high depreciation
- ✓EV/EBITDA less affected by leverage
- ✓Consider maintenance capex adjustment for extreme cases
COMMON MISTAKES
- ✗Using P/E for capital-intensive firms
- ✗Using EV/EBITDA without considering capex needs
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