Question

hi

when considering buying a new firm, we compare P/E with other firms, P Is the acquisition price. and we also compare EBITDA/sales

I understand P/E is how much are we paying for 1 dollar earning and the lower the better, but why EBITDA/sales?

and my main doubt is there was a question asking What range of acquisition prices for Ideko is implied by the range of multiples for P/E, EV/Sales, and EV/EBITDA

in this question the answer was, for example we want to buy Ideko company, and the competitor (Adidas) P/E = 2. SO THE Multiply is. Adidas P/E * Ideko earnings = number

what is the logic behind this equation ? why that was asked in the question ?

thank you

Answer 1

I believe your first question is as to why we use EBITDA/ Sales to compare a company. The answer is stated below:

EBITDA is the Earnings before Interest, Tax, Depreciation and Amortisation. The EBITDA for a company basically evaluates the company by indicating how much earnings the company is able to earn after sales. EBITDA excludes the deductions of interest income and can thus be used to compare companies with competitors that have different capital structures. The Operating Margin (EBITDA/ Sales) can thus be used to evaluate the operational efficiency of that company and compare with its peers.

When determining the acquisition price of a company, we can use an industry average P/E or a competitors P/E to determine the price. When evaluating a company, we have the earnings per share of the company for the given period which cab be used to determine its price.

Assuming like in your question, the competitor (adidas's) P/E is 2. This basically signifies that the market values $1 earned (EPS) by adidas as $2. When arriving at a price for the acquisition, we assume that the target company's (Ideko)'s value would grow as much as its competitors (in this case adidas), provided that the Ideko has strong fundamentals.

Thus, we can find Ideko's price using the P/E method as:

Acquisition price = Earnings of Ideko * P/E multiple of competitor (adidas)

Acquisition price = Earnings of Ideko * 2

Thus, we arrive at the given answer.