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Daniel
Michael Mauboussin just wrote a phenomenal paper on multiples and their role in valuing companies.
The paper is 15 pages long.
Let me give you an introduction by breaking it down for you:
The paper discusses 4 topics:
1. What Multiples Miss
2. The Two Most Popular Multiples
3. Alternative Measures of Earnings
4. EV/EBITDA Deep Dive
1. What Multiples Miss
1.1 Main Problem:
Multiples tell us nothing about the returns of a company.
And if the returns are insufficient (below or at the cost of capital), growing earnings are irrelevant.
- Return above Cost of Capital -> Higher growth leads to higher value
- Return at Cost of Capital -> Higher Growth has no impact
- Return below Cost of Capital -> Higher growth leads to negative value
1.2 Shift to Intangibles
In recent decades, we've seen a shift to intangible assets.
This shift has a material impact on the significance of multiples.
In contrast to tangible assets, intangible assets are often accounted for in SG&A and R&D expenses. Thus, they reduce earnings.
The differences are significant and adjusted for this accounting difference; companies would partially report up to 50% more EBIT or EBITDA.
Because of this, multiples are getting worse at reflecting the economic picture they are supposed to capture.
2. The Two Most Popular Multiples
Price to earnings (P/E) and Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) are the most used multiples.
And while they mostly correlate, there are some factors that cause them to differentiate.
3. Alternative Measures of Earnings
Companies have to report under GAAP regulation (or IFRS for companies outside the US).
But many companies also report non-GAAP numbers. These are adjusted by:
Overall, research has shown that companies report non-GAAP earnings to give investors a more realistic picture of their operations rather than making the company look more profitable than it is.
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Michael Mauboussin just wrote a phenomenal paper on multiples and their role in valuing companies.
The paper is 15 pages long.
Let me give you an introduction by breaking it down for you:
The paper discusses 4 topics:
1. What Multiples Miss
2. The Two Most Popular Multiples
3. Alternative Measures of Earnings
4. EV/EBITDA Deep Dive
1. What Multiples Miss
1.1 Main Problem:
Multiples tell us nothing about the returns of a company.
And if the returns are insufficient (below or at the cost of capital), growing earnings are irrelevant.
- Return above Cost of Capital -> Higher growth leads to higher value
- Return at Cost of Capital -> Higher Growth has no impact
- Return below Cost of Capital -> Higher growth leads to negative value
1.2 Shift to Intangibles
In recent decades, we've seen a shift to intangible assets.
This shift has a material impact on the significance of multiples.
In contrast to tangible assets, intangible assets are often accounted for in SG&A and R&D expenses. Thus, they reduce earnings.
The differences are significant and adjusted for this accounting difference; companies would partially report up to 50% more EBIT or EBITDA.
Because of this, multiples are getting worse at reflecting the economic picture they are supposed to capture.
2. The Two Most Popular Multiples
Price to earnings (P/E) and Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) are the most used multiples.
And while they mostly correlate, there are some factors that cause them to differentiate.
3. Alternative Measures of Earnings
Companies have to report under GAAP regulation (or IFRS for companies outside the US).
But many companies also report non-GAAP numbers. These are adjusted by:
Overall, research has shown that companies report non-GAAP earnings to give investors a more realistic picture of their operations rather than making the company look more profitable than it is.
tweet
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The Long Investor
China is moving away from the Dollar as a store of value.
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China is moving away from the Dollar as a store of value.
What is happening in China?
Gold trading volume in China is now 400% LARGER than the average seen in 2023.
The trading activity in gold on the Shanghai Futures Exchange spiked to 1.3 MILLION lots on the peak day of trading last week.
This came at the same time that gold prices broke above a record $2,400/oz.
Last year alone, China's central bank acquired more than 225 tonnes gold.
Since October, gold is nearly 30% posting one of its best 6-month performances in history.
Why is there so much gold buying in China? tweet
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Brandon Beylo
Say what you want about Bitcoin $BTC and its usability, viability, and value as a currency/medium of exchange.
But @jack and Square $SQ are building the most practical infrastructure available to make that happen.
Like every SQ product, I'm sure this will be beautiful.
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Say what you want about Bitcoin $BTC and its usability, viability, and value as a currency/medium of exchange.
But @jack and Square $SQ are building the most practical infrastructure available to make that happen.
Like every SQ product, I'm sure this will be beautiful.
square sellers: auto-convert a percent of your daily sales to bitcoin: https://t.co/sMiTIZV916 https://t.co/Glnt8gc2eC tweet
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Brandon Beylo
Society if we banned smartphones. https://t.co/e4OU0yx2VL
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Society if we banned smartphones. https://t.co/e4OU0yx2VL
New paper from Norway: Banning smartphones in school
- significantly decreased doctors visits for psychological symptoms and diseases among girls
- reduced bullying among both genders
- improved girls’ GPA and attendance rates
- largest effect sizes were among the poorest kids https://t.co/lCjmNMJtcz tweet
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