How to calculate payback period in PE case

Question

Hi, I'm wondering how to calculate the payback period in a PE case.

If the goal is to have a payback period less then 2 years, do I need to consider the

the amount earned from selling the company at a higher price?

Or, I only need to consider the profit achieved annually?

Answer 1

Hi there,

The payback period is the time needed for an investment to reach a breakeven point. As a consequence, assuming the company is bought at the beginning of year one, you can simply check the sum of the inflows for profits and the expected selling price at that time would be at least equal to the buying price.

Best,

Francesco

Answer 2

Hi! This honestly doesn't make too much sense. The bulk of the cashflow for a PE fund is usually realized in the event of reselling the asset. So ususally the payback is at the end of the ownership period.

Cheers, Sidi

Answer 3

Hi,

As said I would clarify what they meaning.
Having worked in leveraged finance, I can tell you that a key metric is the debt payback period, i.e. in how many years the Free Cash Flow accumulated will cover all the principal debt.
A good metric to keep in mind, especially if you apply for the corporate finance practice :)

Answer 4

Doesn't that go hand-in-hand?

Answer 5

Agree with Sidi.

Can you share the exact prompt of the case? Something here we are not undestanding.

Cheers,

Clara

Answer 6

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