Do you know Michael Burry?
You know, the guy who shorted the housing market.
The Big Short?
A legend at spotting value opportunities, his go-to metric when sifting through the
thousands of stocks out there is a ratio called EV/EBITDA.
What it means, how it’s calculated, and why it's so useful... coming up!
It’s so good to see you.
This channel is dedicated to helping you build your rapidly-growing, highly-diversified net
worth, one video at a time.
And if you’d like to use individual stock selection as one of the ways you get there,
you need to be familiar with this metric.
EV/EBITDA is pretty easy to understand when you’re familiar with its components.
I’ve created videos on each of them, so if you haven’t already, you should probably
watch those first.
I’ll put their links in the description below.
The EV in this equation stands for Enterprise Value, which is essentially a theoretical
takeover price - its the net effect on your financial position if you actually wanted
to buy out an entire company.
EBITDA, Earnings Before Interest Taxes Depreciation and Amortization, is used as a representation
of a company’s current performance.
A lot of successful investors also use EBIT.
Again, check out either of those videos if you’re not totally clear on what all goes
into these metrics.
By dividing a company’s Enterprise Value by its EBIT or EBITDA, you are able to compare
the value of a company, free of debt (the EV), to its earnings, regardless of its capital
structure (the EBIT).
This puts companies on a more level playing field.
It allows you to compare businesses within the same industry or sector to identify anomalies
and mispricings
But it should not be the sole basis for an investment idea upon which you trade.
Additional analysis is absolutely still required.
There is often a reason (sometimes justified, sometimes not) for the discrepancies you’ll
find.
The EV/EBIT or EBITDA Ratios provide an amazing starting point (I’d say better than the
Price-to-Earnings Ratio) in your sifting or screening process that can help dramatically
reduce the overwhelm that comes from staring at the mountain that is the thousands of stocks
in which you could potentially invest…
If you’re interested in an example of this metric being used for valuation purposes,
you may be interested in (one that I’m extremely familiar with) the first article I wrote for
Seeking Alpha.
It was by using this ratio in my sifting process that I found the featured stock.
It was also through a thorough understanding of EV/EBITDA that I was able to come up with
what I felt was a fair value, a number that conservatively implied a more than 200% upside.
Over the year and a half or so since that article was first published the stock has
gone up by more than 250%.
(In the description, I’ll link out to a list of all the trades I’ve ever published
so that I’m not just cherry-picking here.
But if you’re interested in learning more about how this ratio can be used, you might
enjoy at least skimming the logic and analysis I detailed in that article.)
In fact, if you’re interested in the stock selection that I continue to do like this,
you’re the reason I created my Patreon page.
It’s a place where I can share all my research with my private community of interested and
concerned investors.
You’ll find it at Patreon.com/StephenSpicer.
Whatever you do, I sincerely hope this has been helpful for you.
If you’re new here, congratulations on taking this step toward building your rapidly-growing,
highly-diversified net worth.
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And you’ll be well on your way to future success.
I look forward to seeing you again.
One of these videos would be a great next step.
Take care.