Originally Posted by
steve fleming
To me, the simplicity is the beauty of the PE ratio - it provides a pretty quick assessment of a company's relative value against its peers/comparable companies, its sector and the market generally, as well as its own historical PE.
While the Damodaran version is probably more accurate, and is great in theory, practically it would be just too much effort to make much use of.
As Lizard rightly pointed out, EV/EBIT or EV/EBITDA is a far more robust capitalisation multiple, and which i find is being used more and more these days (as it should be!) at the expense of PE ratios.
EV/EBIT and EV/EBITDA multiples eliminate ddifferent types of valuation techniqueistortions between different companies' capital structuring (I), asset utilisation (D&A) and tax positions (T), thus providing a far more accurate estimate of operating earnings for each company - which in turn makes it a better measure for comparable company analysis as you are comparing like against like.
However it requires a bit more work to calculate than a PE - unless you have access to a financial database like Bloomberg or Reuters!
Zyreon - you can simply deduct debt/surpus cash from the firm valuation/Enterprise value and that gives you the equity valuation / market cap.
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