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My basic question is this: I know that investors can use several different multiples when thinking about valuing companies (P/E, EV/EBITDA, EV/Sales, etc.) but how do you know when to use each one? E.g., in what situations would you want to use a P/E multiple to value a company instead of EV/EBITDA? When would you use EV/Sales over P/E? Just looking for general guidelines here.
Thank you.
When I look at buying a stock, I tend to look at its price to earnings ratio early. However, this measure does not make sense if the company is losing money. Also, if the company was losing money and is now just made a small profit the price to earnings ratio may be misleading. For a company losing money, a better measure might be the price to sales. What you call EV/Sales.
I tend not to look at EV/EBITDA. I do not feel EBITDA is a good measure because just about all companies need new capital assets over time. Normally taxes have to be paid at the corporate level if the company is making money. As such, EDITDA is not giving you right picture.
When you compute the PE ratio, do you use the GAAP earnings or the adjusting earnings? I tend to use the adjusted earnings because they should not have any one time events with them. However, you should understand how the adjusted earnings are computed because at times it seems to me that the adjusted earnings are adjusted to make the management of the company look good.
Note: If you are just starting out in the investing world with a small amount of money, I would not buy individual stocks.
Note: If you are just starting out in the investing world with a large amount of money, I would buy individual stocks with the help of an investment professional.
