medium · Investment Banking
An analyst is valuing a bank using an Enterprise Value to EBITDA multiple.
Why is this methodology likely to produce a flawed result?
- For banks, interest is an operating expense and debt is an operating liability, making EV and EBITDA inconsistent
- Banks are always valued exclusively using a Dividend Discount Model rather than EBITDA-based multiples.
- Banks generally do not report meaningful Depreciation or Amortization, so EBITDA effectively equals EBIT for most banks.
- EBITDA is artificially too high for banks specifically because of their inherently very high degree of financial leverage.
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