We can simplify this further, if we consolidate the
reinvestment terms:
Inotherwords,theEV/EBITDAmultipleisafunctionofthe
same variables that determine the operating earnings
multiples,withcompanieswithhighergrowth,lowercostof
capital, and higher return on capital (which pushed down
reinvestment) trading at higher multiples of EBITDA. In
addition, firmswith significantdepreciation chargesshould
tradeatlowermultiplesofEBITDAthanotherwisesimilar
firms(intermsofgrowth,costofcapital,andreinvestment)
without this depreciation.
As a final note, the pretax earnings multiples (EBIT and
EBITDA)arealsoaffectedbythetaxrate,withhighertax
ratestranslatingintolowermultiplesofpretaxearnings.Asa
consequence,we wouldexpectcompaniesincorporatedand
trading inhigher-tax locales to tradeat lowermultiples of
EBITDA than companies in lower-tax locales.
Tounderstandthedeterminantsofvalue-to-bookratios,letus
revert again to the stable-growth model: