Which multiple would you avoid using for valuation under normal circumstances?

• A. Enterprise Value/Revenue
• B. Equity Value/EBITDA
• C. Enterprise Value/EBITDA
• D. Equity Value/Revenue

Answer: (B)

When considering multiples for valuation, Equity Value/EBITDA is typically less useful than the others listed. This is because EBITDA is an operating performance metric that is largely independent of a company's capital structure; it reflects the company's earnings from its core operations. In contrast, Equity Value accounts for the entire market capitalization of a company's equity, which is impacted by debt and other financial obligations.

Using the Equity Value/EBITDA multiple mixes these two different components—equity valuation and operating performance—leading to a potentially misleading analysis. Valuations based on EBITDA are best paired with Enterprise Value, which encompasses both equity and debt, to give a clearer picture of the firm's value in relation to its earnings.

In normal circumstances, ratio comparisons should maintain consistency in terms of what they measure. Keeping equity metrics (like Equity Value) aligned with equity performance indicators and enterprise metrics (like Enterprise Value) with operating performance metrics (such as EBITDA) provides a more accurate reflection of a company's financial standing. Therefore, using Equity Value/EBITDA might distort the valuation process, making it the multiple to avoid in typical evaluation practices.