IB Interview Questions: Valuation Multiples

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1. How do you value a business that is losing money?

For comparables analysis, you could use EV/Revenue multiples.

For a Discounted Cash Flow analysis, you’d have to project out until the business makes money and ultimately hits a steady-state level of growth.

Explanation:
This is a variant of, what multiple would you use to value a money-losing/early-stage business. It also tests whether you understand the overarching goal/process of building out a DCF analysis.

2. When would you use EV/Revenue as opposed to EV/EBITDA?

You generally use EV/Revenue when a company doesn’t have EBITDA (i.e. EBITDA is negative) and/or hasn’t when the business hasn’t fully matured. EV/EBITDA is used when a business is near or at maturity with stable earnings.

First, if you have negative EBITDA, the multiple is meaningless, so interviewers want to see if you understand that. Second, a common follow-up here is…What would you use if a company just became profitable? The answer is that you’d probably still use EV/Rev because EBITDA likely doesn’t reflect mature margin levels.


3. A startup business just became profitable in the most recent year reported. What is the right EV metric to use?

Because this company is still in the early stages of its development, an EV/Revenue multiple would likely be more appropriate until the company achieves a normalized (or ‘mature’) level of profitability.

The typical delineation between when to use EV/Revenue multiples as opposed to EV/EBITDA multiples is that you use EV/Revenue when a company is losing money. But there’s a bit of a grey area between initial profitability and full/mature margins in which judgment is required, which is what this question is testing.

4. What is the difference between Levered and Unlevered multiples?

Unlevered multiples (EV/Revenue, EV/ EBITDA, etc.) do not take into account a company’s level of debt.

Conversely, Levered multiples (Price/Earnings, Price/Book etc.) do take into account a company’s level of debt.



5. What is the difference between an EV multiple and a P/E multiple?

Enterprise Value (EV) multiples measure a company’s Enterprise Value compared to an unlevered accounting metric like EBITDA or Revenue.

In contrast, P/E multiples measure the price of a company’s Equity Value compared to Net Income which is a levered metric.


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