Why does EV/EBITDA account for companies’ differing leverage levels?

Whether a company’s debt ratio is 5% or 15% affects its financing environment—not its operations. EBITDA can be viewed as a proxy for operating cash flow, measuring the company’s ability to generate cash from its operations—especially its core business activities. Returning to the EV/EBITDA valuation multiple: EV = market cap (equity) + debt (plus certain adjustments), representing a metric from the perspective of *all* investors—not solely equity holders or creditors. Moreover, EBITDA is an unlevered cash figure, meaning it excludes the impact of capital structure. Therefore, EV/EBITDA enables comparisons across companies with different financial leverage levels. Here’s a simple example: Two companies operate in the same industry and report identical EBITDA, trading at 10x EBIT. Company A: EBITDA = $100mm; D&A / CAPEX = $20mm → EBIT = $80mm EV = $800mm EV / EBITDA = 8 Company B: EBITDA = $100mm; D&A / CAPEX = $50mm → EBIT = $50mm EV = $500mm EV / EBITDA = 5 Company A’s CAPEX is less than half that of Company B, yet both report the same EBITDA—indicating Company A uses its assets more efficiently. In corporate valuation, EV/EBITDA is a key multiple used in transaction comps and trading comps analyses. It is especially suitable for industries requiring massive upfront capital expenditures, which must be amortized over long periods. It is widely adopted in U.S. markets but used more sparingly in China. Additionally, EV/EBITDA can serve as an *exit multiple*. What does this mean? When applying DCF analysis, one forecasts cash flows over a projection period and then applies an EV/EBITDA multiple based on the final year’s EBITDA to estimate the terminal enterprise value—thereby capturing the company’s future cash-generating capacity. In summary, EV/EBITDA is applied in valuation as follows: (1) Project financials for quarters/years. (2) Derive an expected EBITDA based on reasonable assumptions. (3) Apply an EV/EBITDA multiple derived from comparable companies (typically using more than one multiple in this step). (4) Arrive at an expected EV.

Chapter 16: Capital Structure — Fundamental Concepts (★)

I. Financial Leverage Financial leverage refers to the magnifying effect whereby changes in earnings per share (EPS) exceed proportional changes in earnings before interest and taxes (EBIT), due to the presence of debt.[1] EPS = \frac{(EBIT - Interest) \times (1 - t_{c})}{Shares} = \frac{(EBIT - D \times r) \times (1 - t_{c})}{(A - D) / P_{0}} = \left[\frac{EBIT}{A - D} - \frac{D \times r}{A - D}\right] \times P_{0} \times (1 - t_{c}) From the above equation, the slope of EPS as a function of EBIT equals \frac{1}{A - D}. Assuming total assets (A) remain constant, as debt (D) increases, the slope increases—and thus financial leverage increases. II. Modigliani and Miller Proposition I (No Taxes) This proposition states that the value of a levered firm equals that of an unlevered firm. Its rationale is that individual investors can replicate the capital structure of a levered firm through homemade leverage—and thereby achieve identical returns. A key prerequisite for this result is that individuals can borrow at the same interest rate as the firm. Let the levered firm’s assets and debt be A and D, respectively. Suppose an investor purchases S shares of this levered firm at current market price P₀. Let S′ denote the number of shares purchased via homemade leverage. Using the EPS formula above and assuming t_c = 0, we obtain: \left[\frac{EBIT}{A - D} - \frac{D \times r}{A - D}\right] \times P_{0} \times S = \frac{EBIT}{A} \times P_{0} \times S' - r \times P_{0} \times (S' - S) Solving yields S' = S \times \frac{A}{A - D}. Thus, under identical borrowing rates, there always exists a solution for homemade leverage such that investing in the levered firm and constructing homemade leverage entail identical costs and deliver identical returns. III. Modigliani and Miller Proposition II (No Taxes) Proposition II states that, in the absence of taxes, a firm’s weighted average cost of capital (R_{WACC}) is independent of its capital structure—it remains constant. However, as financial leverage increases, shareholders demand a higher required return on equity. Because debt has priority over equity in claims on cash flows, increasing the debt ratio raises the risk borne by equity holders; hence, shareholders rationally require a higher expected return. The lower cost of debt offsets the rising required equity return, leaving R_{WACC} unchanged. The independence of R_{WACC} from capital structure can be intuitively explained as follows: A firm’s value equals the present value of its future cash flows, discounted at R_{WACC}. Since we consider only changes in capital structure—i.e., shifts in the debt-to-equity ratio—we may assume future cash flows remain unchanged. Further, by Proposition I, V_U = V_L (the values of unlevered and levered firms are equal). Consequently, R_{WACC} must be identical across all capital structures.

Braskem: Spread normalization cut recurring EBITDA to US$382 million; leverage ended at 6.36x

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Braskem reported a 63% quarter-over-quarter decline in recurring EBITDA to US$382 million due to normalized petrochemical spreads, while adjusted leverage rose to 6.36x.

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