ponderings & pennings

Received a link to an interview of Mr Sanjiv Agarwal, Partner and National Head, Valuation services, E&Y. You can check the complete interview here

To the question, that EV/EBIDTA is free from interest rate and depreication and hence is better than P/E, Mr Agarwal says that interest rate vary from company to company and hence the comparison is not true.

However, to that i believe that since EBIDTA leaves out interest it may not account for the riskiness in the business. A business’ risk is measured by the premium the market demands from it and it is reflected by the rate of interest being charged to the company. Hence a company that is thought of as risky will pay higher interest rate and hence will have a higher operational cost while a company that is less risky will similarly have a lower operational costs. A riskier company can over a period work diligently to reduce the premium demanded and improve its position vis-a-vis other companies less riskier.

So, i’d rather say that since EBIDTA ignores interest, it is its deficiency and not that of P/E ration which includes everything.