Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Valuation Multiples
5 conceptsEV/EBITDA versus P/E
EV/EBITDA prices the whole business before anyone is paid — lenders, the tax authority, the depreciation of the assets. P/E prices what is left for shareholders after all of them. Two companies on the same EV/EBITDA can sit on very different P/Es if one carries more debt, depreciates more, or pays a different tax rate — and two on the same P/E can be worth very different multiples of EBITDA. Neither is "right". EV/EBITDA compares businesses; P/E compares what an equity holder gets. An analyst who can walk from one to the other, and say why they differ, understands the capital structure.
Free cash flow yield
Earnings are an opinion; cash is a fact. Free cash flow yield asks what the business actually throws off, after the capex it needs and the interest and tax it must pay, as a percentage of what you pay for the equity. It is the number to set against a bond yield: a 9% FCF yield in a stable business is a 9% coupon that can grow, and if the company spends it buying back its own shares, it retires 9% of the share count a year. The unlevered version — cash before interest, over enterprise value — compares businesses across capital structures, just as EV/EBITDA does for earnings.
PEG and growth-adjusted multiples
A P/E on its own says nothing about whether a stock is cheap, because a high multiple on fast growth can be a better deal than a low multiple on none. The PEG ratio divides the P/E by the growth rate to put the two on the same footing: a stock on 30x growing 30% a year is on a PEG of 1.0, the same as one on 10x growing 10%. The rule of thumb says below 1 is cheap and above 2 is dear. It is crude — it ignores how long the growth lasts, how risky it is and whether any cash comes back — but it is the fastest way to compare a growth stock with a value stock, and it is the first number a PM will ask for.
Sum of the parts
When a company runs two businesses that the market values differently, one multiple for the whole is wrong for both. A sum-of-the-parts values each segment at the multiple its own peers trade on, subtracts the head-office costs that belong to neither (capitalized, because they recur), subtracts the net debt, and compares the answer with the share price. The gap is the conglomerate discount — the market’s charge for complexity, for the chance the good business subsidises the bad one, and for management that may never separate them. An activist’s pitch is usually just a SOTP with a plan to close the gap.
The multiple bridge: where a stock’s return comes from
A share price is earnings times a multiple, so a return has to come from one of three places: the earnings grew, the multiple changed, or you were paid a dividend while waiting. The bridge separates them. Earnings growth is the company’s work; multiple change is the market’s mood; the dividend is cash. Run it forward and it tells you what a stock can return if the multiple does nothing. Run it backwards and it tells you what multiple the stock must exit on to hit a target return — which is the honest way to see how much of a pitch is a bet on re-rating.