IFF is priced at a steep multiple of 31.95x based on its prior year’s earnings, which is 1.94 times more expensive than the 16.5x average multiple of the Chemicals. Yes, this expensive multiple can initially be deterring, but there are many company-specific elements which are not captured in such a static ratio – such as its growth outlook and debt obligations. In this article, I am going to take you through some key things to consider in order to identify which multiple is the most relevant for IFF. Let’s dive in.
How much does IFF earn?
PE is only used when a company is profitable, such as IFF. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. IFF’s previous earnings record has continuously produced positive numbers. This means investors can draw some insight from using the PE ratio, but let’s see if there is a better alternative.
Does IFF owe a lot of money?
Yes. As a rule of thumb, debt shouldn’t exceed 40% of equity. Currently, ’s 96.47% debt-to-equity ratio indicates its financial positioning is not optimal. The current ratio can be interpreted as for every $1 a shareholder owns, it owes $0.96 to creditors. This can be risky, given that in the event of bankruptcy, these debtors receive the first claim on the assets of the company. Debt levels matter when valuing the business because in theory IFF’s share price represents the equity portion only, but its important to account for debt, as debt also contributes to the company’s earnings capacity and risk. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.
IFF’s EV/EBITDA = US$11.25b / US$0 = 14.31x
Does IFF have a fast-growing outlook?
With an expected annual growth rate of 11.48% each year for the next five years, I’d say IFF has an upbeat growth outlook. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected growth, which isn’t ideal as you are using past values to gauge future performance. Buying a stock means you’re entitled to future earnings, not the past. Therefore, it’s more useful to focus on what you’ll receive. To shift our analysis to focus on the future, we will use a forward figure for EBITDA based off analyst forecasts for the year ahead.
IFF’s forward EV/EBITDA = US$11.25b /US$804.69m = 13.98x
Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.