A company trades at 8 times EV/EBITDA with EBITDA of $200m and net debt of $400m. Depreciation and amortisation is $60m, interest expense is $24m and the tax rate is 25%. What is its price to earnings ratio?

A company trades at 8 times EV/EBITDA with EBITDA of $200m and net debt of $400m. Depreciation and amortisation is $60m, interest expense is $24m and the tax rate is 25%. What is its price to earnings ratio?

Approach: Move from enterprise value to equity value by subtracting net debt, then walk EBITDA down to net income through depreciation, interest and tax before forming the ratio.

13.8. Enterprise value is 8 * 200, or $1,600m, so equity value is 1,600 - 400, which is $1,200m. EBITDA of $200m less $60m of depreciation and amortisation gives EBIT of $140m, less $24m of interest gives pre-tax income of $116m, and after 25% tax the net income is $87m. The price to earnings ratio is 1,200/87, which is 13.8. The bridge shows why the two multiples rank companies differently: an enterprise value multiple is blind to capital structure and to the depreciation load, so a capital-intensive levered company can look cheap on EV/EBITDA and expensive on earnings. Comparing both multiples across a peer group isolates whether leverage, the tax rate or asset intensity explains the gap.

Follow-up: A peer trades at the same 8 times EV/EBITDA with no debt and half the depreciation. What is its price to earnings ratio and what does the difference tell you?

Key concepts: enterprise value, equity value, net income, price to earnings.