Market based valuation_EV/EBITDA

jitender.grover99
Posts: 4
Joined: Mon Feb 15, 2016 11:13 am

Market based valuation_EV/EBITDA

Postby jitender.grover99 » Sun Feb 28, 2016 12:02 pm

In scheweser it is given that "if working capital is growing, EBITDA will overstate CFO". Can you please explain how does this relation hold?
Thanks.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Market based valuation_EV/EBITDA

Postby edupristine » Thu Mar 10, 2016 9:54 am

Hi Jitender
it is just because FCFE (free cash flow for the firm)is more preferable to operating cash flow, and free cash flow of a industry captures the capital amount of capital expenditure.so it highly connected with the valuation theory than EBITDA.

jitender.grover99
Posts: 4
Joined: Mon Feb 15, 2016 11:13 am

Re: Market based valuation_EV/EBITDA

Postby jitender.grover99 » Mon Mar 14, 2016 4:29 pm

Thanks.

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Re: Market based valuation_EV/EBITDA

Postby aroranidhi2004 » Sat May 07, 2016 11:30 pm

Hi

Just one additional input ---

If working capital is increasing than current assets > current liabilities and as we are subtracting the increase in current assets, when calculating CFO as use of cash so it will reduce CFO. which is not the case with EBITDA (we are just subtracting COGS, SG&A expenses). and in the case of increasing working capital it will reduce CFO.. so EBITDA > CFO.

Regards,
Nidhi


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