Yeshiva
13-01-2016, 05:24 PM
Hi all,
After doing a lot of reading, I've come to the conclusion that EV/EBITDA is better than the P/E ratio for the following reasons:
P/E Ratios are often subject to one off profits affecting earnings (tax related, for example). EV/EBITDA allows for more even comparisons
EV/EBITDA takes into account a company's net debt levels, whereas a company with a low P/E might also have high debt (and therefore be more risky despite being cheap at first glance)
It's easier to manipulate post-tax earnings than pre-tax earnings, so EBITDA is better than earnings
Tax rates are different for some companies that operate overseas, so being able to compare earnings pre-tax is useful (particularly for comparing NZ to Australian companies)
but I am keen to hear the contrary view - can anyone give me some ideas why using P/E is best for analysing companies?
After doing a lot of reading, I've come to the conclusion that EV/EBITDA is better than the P/E ratio for the following reasons:
P/E Ratios are often subject to one off profits affecting earnings (tax related, for example). EV/EBITDA allows for more even comparisons
EV/EBITDA takes into account a company's net debt levels, whereas a company with a low P/E might also have high debt (and therefore be more risky despite being cheap at first glance)
It's easier to manipulate post-tax earnings than pre-tax earnings, so EBITDA is better than earnings
Tax rates are different for some companies that operate overseas, so being able to compare earnings pre-tax is useful (particularly for comparing NZ to Australian companies)
but I am keen to hear the contrary view - can anyone give me some ideas why using P/E is best for analysing companies?