EV/EBITDA

What is EV/EBITDA? Why Is It Useful?

EV/EBITDA is also known as the enterprise multiple. It is a preferred indicator to evaluate a company. Enterprise value (EV) is the market value of a company, taking into consideration of operating liabilities. EBITDA (earnings before interest, tax, depreciation, and amortization) is an indicator of the company's profitability and efficiency of operation. Therefore, by comparing EV with EBITDA, which means comparing the market value to the company’s business profit, we can have a snapshot of whether or not a company is fairly valued by the market from the perspective of business operation.

Calculation

Enterprise Multiple = EV ÷ EBITDA

EV = Market Capitalization + Debt - Cash

EBITDA = Earnings Before Tax Debt And Amortization

What Does the Ratio Tell Us?

Since EV/EBITDA is a relative valuation measure, investors need to compare the EV/EBITDA ratio between similar companies or companies in the same industry to draw a conclusion. Also, since this ratio only reveals the company’s value from the business operation perspective, it is recommended to perform more analysis before concluding that a company is undervalued or overvalued.

From merely the EV/EBITDA perspective:

A High EV/EBITDA

• Potentially overvalued
• Often expected in high-growth industries

A High EV/EBITDA

• Potentially undervalued
• Often expected in mature, stable industries