Ebitda Case

The company I pick from S&P 500 is Google Inc., which is a multinational corporation specializing in internet-related service and products. Google has been estimated to be a rapidly growing global technology leader focused on improving the way people connect with information, and its trading stock price is remained really high and still on the rise.

The expected sales are given by Capital IQ from year 2014 to year 2018, and their values are listed below in the table. By calculating the average growth rate of sales over next five years, which is 12.8%, and have it compared with the one from the previous three years, which is 25.8%, it can be concluded that the projected sales value given by Capital IQ are reasonable. The average growth rate for the next five years represents a stable rate for a longer term, which should be lower than the short-term one when seeing the future performance of the company in a long-run view (Appendix A).

Table1. Expected Cash Flows (in millions)

2014 2015 2016 2017 2018

Sales 68,176 78,377 88,614 98,769 109,330

The estimated EBITDA to Sales ratio is gained by calculating the average value of EBITDA margins from year 2011 to year 2013, which is 33.3%. Because the sales margins are acquired by Capital IQ from the market data as reliable source, we can use the average of the previous three years’ EBITDA margins as a constant multiple to project the future five years’ EBITDA. By assuming a constant EBITDA/Sales ratio for the next five year, we can get the EBITDA value using this ratio and projected sales. The predicted EBITDA value are different from the values given by Capital IQ mainly because the future five years revenues are estimated with a comparative slower growth rate, resulting in lower EBITDA/Sales ratio and also lower EBITDA (Appendix A).

Table2. EBITDA (in millions)

2014 2015 2016 2017 2018

EBITDA 22,702 26,099 29,507 32,889 36,405

As given by EDGAR, the effective tax rates for the periods of year 2011 to 2013 from its 10-K form are 21%, 19.4%, and 15.7% respectively. So, I use the average value, which is 18.7% as the anticipated tax rate for the future calculation because Google is a mature and stable company that its tax rate will not fluctuate significantly on an annually basis. In addition, the depreciation and capital expenditure given by Capital IQ are reasonable because they use the average margin from the previous three years values to predict future. The change in net working capital from year 2014 to 2018 are also reasonable and in a decreasing trend due to a decrease in income tax rate. By applying those values in the table, we can get the anticipated free cash flows over the next five years for Google (Appendix B). The results