It's fun to look at E B I T D A

I noticed in one of the Sunday newspapers that HIT entertainment (Thomas the Tank Engine – owner) are looking for a sale of the company for between $1bn and $1.5bn. This would be between a multiple of 12.5 and 18.7 times their 2010 EBITDA figure. Whilst this looks ambitious, media companies are often valued and bought on a multiple of earnings before interest, tax, depreciation and amortization.

This prompted me to take a little look again at the last full year’s accounts for two of the media companies that I currently hold.

DCD Media produced an EBITDA figure of £2.3m last year. If you applied the multiples above then you could argue that DCD is potentially worth between £28.75m and £43m. DCD’s current market cap. is around £5m.

Avesco produced an EBITDA figure of £19.7m. Again applying a multiple of 12.5 to 18.7 gives a potential value of £246m to £368m. Avesco’s current market cap is around £23.5m.

Of course EBITDA is only one value measure, and disliked by some investors. However, DCD is currently on a fully diluted p/e ratio of about 3, and had more cash on its balance sheet (£5.4m) than the company is currently worth. Avesco is also cheap on all sorts of value measures including it’s tangible NAV (£1.43 per share), a forward single digit p/e ratio for 2012 and a possible £1.79 payout per share from Disney. Hence, I don’t envisage selling either in the foreseeable future.

Note: I feel that it is important to point out that Warren Buffett is particularly unflattering about managers who continually stress the EBITDA figure. However, as I mention above, DCD and Avesco are attractively priced on a range of important measures.