Your question is Choose EV/EBITDA vs P/E. Take a moment with it on the right.
Talk me through your thinking if you like. When you're confident, submit your answer and I'll grade it like a real screen (7/10 or better passes).
You are comparing two public companies in the same industry after a sharp move in sector valuations. Your CFO asks which valuation multiple is more appropriate for a quick relative-value screen because one company has much higher leverage and a lower tax rate due to NOLs. You need to explain the difference using the current capital structures and earnings profile rather than giving a textbook answer.
| Metric | Company A | Company B |
|---|---|---|
| Share price | $40.00 | $30.00 |
| Diluted shares outstanding | 100.0M | 100.0M |
| Total debt | $2,000.0M | $500.0M |
| Cash | $200.0M | $100.0M |
| EBITDA | $600.0M | $600.0M |
| Depreciation & amortization | $150.0M | $150.0M |
| Interest expense | $120.0M | $30.0M |
| Tax rate | 10% | 25% |
How would you calculate EV/EBITDA and P/E for each company, and why is EV/EBITDA the more useful comparison here? Based on the numbers, what distortion would you highlight if someone relied only on P/E?