Managing Price multiples with Italian GAAP

When assessing the market value of a company, Price Multiples such as EV/Ebitda are commonly used in Italy as anywhere else. However, as Italian accounting principles differs from US GAAP and IAS, in order to avoid misrepresentations some adjustments should be made to Financials before applying the peers multiples. Let's have a look to some of these adjustments.


Different accounting principles and tax deductible costs
a) IRAP
Irap is a tax applied in Italy on a specific concept of taxable income: roughly taxable income for Irap may be defined as pre-tax income plus labour cost. However in Profit and Loss the Irap cost is included in “Income tax of the period” and therefore Ebitda does not include it. We consider this incorrect, as the Irap portion referred to labour cost should be included within all others costs for personnel to represent the entire labour cost as elsewhere in Europe. So, should we want to have a figure for labour cost comparable to that labour cost is in other countries, then we have to add this portion of tax. We simply add the Irap cost on labour (today it is at 3,4%) to labour cost and we deduct this amount to income tax of the period. Labour cost increases, Ebitda decreases, income tax of the period decreases. And we get a precise view of what the real Labour costs and Ebitda are.


b) Cost capitalisation to intangibles and amortisation
According to Italian accounting principles, Intangibles include non material assets that bring a cash flow over a long period but may also include capitalised costs that the Italian tax authority does not allow to consider as a deductible cost in one single year. In this case (for instance: marketing costs incurred to attend a fair) the company books the full cost in the first year and then capitalises part of the cost equal to the non deductible portion as an Intangible assets. This amount will be amortised in the following years. In order to make reports comparable both over time and internationally we better work the opposite way: we move back the cost in the year it occurred and we delete the additional Intangible amount and the additional amortisation.


c) Leasing
Leasing is popular among industrial companies in Italy as it is the preferred way to finance Capex. Leasing however must be accounted following the fiscal law and this increases the cost in P&L and the remaining outstanding debt compared to a financial booking. As a result, applying tax rules we get a misleading picture of the company, that generally look worse than it is. We have to restate all accounts with a financial method instead of the domestic fiscal rules.


Restated P&L and restated Debt

There might be other adjustments to be made based on the type of company we analyse. But even focussing on the above mentioned aspects only, we are able to generate a restated P&L with different Ebitda and different Ebit and a new calculation for Net Financial Position. These restated amounts should be the basis for applying our peer Price Multiples.

Do not limit multiples to EV/Ebitda!

Finally let's have a look to generally used price multiples. We consider EV/Ebitda as a powerful value indicator. We believe that in addition EV/Ebit and P/E and P/CF should also be considered. There isn't much to argue on EV/Ebit and on P/E. Let briefly discuss P/CF: as Cash Flow (CF) we consider operating cash flow simply calculated as Net income plus depreciation and amortisation. P/CF may be used as a proxy of EV/Ebit: in companies with relevant financial debt and / or relevant depreciation provisions P/CF becomes a very powerful tool for peer comparisons.