Tell me whether these are more related to multiples of equity value or multiples of enterprise value: revenue, P/E, EBITDA.
Revenue and EBITDA are enterprise value multiples because they are available to all capital providers (pre-interest), while P/E is an equity value multiple because net income is the residual belonging only to equity holders (post-interest).
Intuition
The core principle is matching: metrics available to ALL investors (debt + equity) pair with enterprise value, while metrics available ONLY to equity holders pair with equity value. Revenue and EBITDA sit above interest expense on the income statement, so they belong to all capital providers and map to EV. Net income sits below interest expense, so it belongs solely to equity holders and maps to equity value.
Watch
A common trap is EBIT — it's also an enterprise value metric since it's pre-interest. Interviewers may also ask about Free Cash Flow: unlevered FCF pairs with EV, while levered FCF (after debt service) pairs with equity value. Don't confuse the two.
Deep Dive
Classify revenue, P/E, and EBITDA as multiples of equity value or enterprise value based on the numerator-denominator consistency principle.
Core Principle: The numerator and denominator of a valuation multiple must be consistent — metrics available to ALL capital providers (debt + equity) pair with Enterprise Value (EV), while metrics available ONLY to equity holders pair with Equity Value.
| Metric | Who has a claim on it? | Sits above or below interest expense? | Paired with |
|---|---|---|---|
| Revenue | All capital providers (debt & equity) | Above — top of the income statement | Enterprise Value |
| EBITDA | All capital providers | Above — pre-interest, pre-tax | Enterprise Value |
| Net Income (the 'E' in P/E) | Equity holders only | Below — after interest & tax paid to debt holders and government | Equity Value |
Step 1: Revenue → EV/Revenue
- Revenue is earned before any payments to debt holders (interest) or equity holders (dividends). All capital providers have a claim. Numerator = EV.
Step 2: EBITDA → EV/EBITDA
- EBITDA is computed before interest expense, so both debt and equity holders sit above this line. Numerator = EV.
Step 3: P/E → Equity Value / Net Income
- Net Income is the residual after interest expense (paid to debt holders) and taxes. Only equity holders have a claim. Numerator = Equity Value (i.e., Price per share × Shares outstanding = Market Cap).
Summary:
- Revenue → Enterprise Value multiple
- EBITDA → Enterprise Value multiple
- P/E → Equity Value multiple
Shortcut: If the metric is calculated before subtracting interest expense, it pairs with EV. If it is calculated after interest expense, it pairs with Equity Value.