🎯 Goal: Use multiples to compare firms and see why P/E alone can mislead.
Valuation by multiples (P/E, P/S, EV/EBITDA) compares a firm to similar firms. EV (enterprise value) = market cap + debt − cash — the "price to buy the whole business". EV/EBITDA compares more fairly than P/E when firms carry different debt, because EV already includes debt.
Let’s explore
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Market cap = price × shares (equity value). EV = market cap + debt − cash (whole-business value).
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EBITDA = earnings before interest, tax, depreciation & amortization — close to operating cash generated.
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Two firms with equal profit but different debt: P/E can mislead; EV/EBITDA compares more fairly.
Practice activity
🧮 Market cap 80B, debt 30B, cash 10B. What is EV?
Worked example: EV = 80 + 30 − 10 = 100B. If EBITDA = 20B, EV/EBITDA = 100 ÷ 20 = 5×. Versus a peer at 7×, this firm is relatively cheaper.
Quick quiz
1. EV (enterprise value) = ?
→ Market cap + debt − cash
2. Why does EV/EBITDA compare more fairly than P/E?
→ EV includes debt across firms
3. Market cap 50B, debt 20B, cash 5B. EV?
→ 65B
4. EBITDA is earnings before?
→ Interest, tax, depreciation, amortization
5. Valuation by multiples means?
→ Comparing to similar firms
🎯 Real-life mission
For a company you care about, look up market cap, debt and cash; compute EV = market cap + debt − cash. Compare: how does EV differ from just market cap? Note 1–2 sentences.