Investment Banking Interview Questions

How do we decide between using EV/EBITDA vs EV/Sales?

By January 28, 2022No Comments

The investment banking interview question we’re going to go over today is “How do we decide between using EV/EBITDA vs EV/Sales?” There are so many different multiples out there. How do you choose which multiple to use to value a company? Here’s what you can say.

Interview Answer

“In general, I would use EV/EBITDA to value businesses because EBITDA represents profit whereas EV/Sales neglects the impact of cost. However, there are three situations where I would place greater emphasis on EV/Sales.  

First, if the company has negative EBITDA, then EV/EBITDA would not be meaningful. In this case, I’d use EV/Sales instead of EV/EBITDA.

Second, if the company has positive EBITDA, but it’s very tiny relative to the Enterprise Value, then EV/EBITDA would be some really big number. That would also not be meaningful and I’d use EV/Sales instead.

Third, if the company is very high growth and faces evolving cost structure such that its current costs are not representative of what it’ll incur in the future, then I may choose to use EV/Sales instead because it’s a better reflection of the company’s future earnings potential.

So that’s how I’d choose between EV/EBITDA and EV/Sales.”

Additional Tip

In short, that’s how you answer the question: “How do we decide between using EV/EBITDA vs EV/Sales”. Now to be honest, this is a very silly question. This question implies that bankers use only one multiple to value a company. But in reality, bankers just show the valuation across different multiples. This means the interviewers are kind of asking you things that they don’t even do at work. So that’s why it’s silly. But nonetheless, you still have to know how to answer the question.

More IBD Interview Questions

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Which valuation method gives the highest valuation?

How does raising debt affect a company’s P/E multiple?

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