Sunday, July 13, 2014

All About EV/EBITDA Today

I'm going to make this a short post for today, since I just received a nice big shipment of books that I bought from Amazon and I am excited to read them all! I will probably write a post later tonight or tomorrow and show all the books that I bought, which would be the book reviews that I will be writing in the future!

But for today, I want to just mention about EV/EBITDA. What is EV/EBITDA? Well, this article gives a good short summary about what it is.

I like to simplify the way of explaining EV/EBITDA to people. If you don't want to know how to calculate or what it means, all you have to know is that it is the improved P/E ratio.

P/E ratios are one of the most common ratios used today in the financial world. I personally have used it as a metric, but I have come to realized that EV/EBITDA is a much better metric, which much better implications. Replacing P/E with EV/EBITDA improves the quality of your stock screening regarding valuation.

This article shows the difference in using the different valuation methods, which I think is quite a good and fair example of why EV/EBITDA is a better metric to use. Interestingly though, they recommend using P/CI for evaluating financial companies. I have to do more research about this. Of course, in the ideal world, we would have have ONE single awesome metric that tells us to buy and sell, but alas, investing is not so easy.

Since my previous post about me thinking of better ways of stock picking (part 1) and (part 2), I have been reading and thinking about what are good and useful valuation metrics that can be used. I will have to think about quality and financial strength. Shareholder yield is quite straightforward, with only 2 variants - including debt repayment or not. I would prefer to include debt repayment since it would be more comprehensive.

For the real hard-core, here is a good reading about why EV/EBITDA matters (and doesn't) depending on your investing style. I'm not too sure if I agree with the author that EV/EBITDA doesn't matter if you're buying and holding, because he doesn't make it clear that buying purely based on low EV/EBITDA can cause you to own plenty of value traps.

What valuation metric do you use in your analysis and why? If not, why don't you use valuation metrics at all? Valuation helps us realize when things are cheap (time to buy) and when things are expensive (time to sell), and I think that they should be one of the most important inclusions in considering an investment.

1 comment:

  1. As per today's Stock Cash updates, it is good to buy TIMKEN INDIA above 347 TG 350, 354, 360 SL 343.

    ReplyDelete

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