Enterprise value multiples contrary, regarding, companies

zbird2134

hey guys, i have two questions regarding this issue from CFAI books.

1. Page 537, it says one possible drawback to use EV/EBITDA is that EBITDA will overestimate cash flow from operations if working capital is growing.

what does that mean? why this multiple is related to CFO?

2.Page 541-542,example 35, solution to 3, WDC appears undervalued to other two companies, but it has higher ROIC and higher revenue growth, which i think is contrary to the undervaluation. why the book says these two factors support undervaluation??

Any thoughts will be apprecaited!!

kkn006

good explanation samurai. For #1, EBITDA just doesn't show working cap investment therefore cash flow is overstated.

19831985

thanks samurai, fantastic explanations!