Enterprise value/EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.
An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt.
The EV/EBITDA multiple requires prudent use for companies with low profit margins (i.e., for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability).
Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest (i.e., as a benchmark). An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.
The reciprocate multiple EBITDA/EV is used as a measure of cash return on investment.
- Earnings before interest and taxes (EBIT)
- Earnings before interest, taxes, and amortization (EBITA)
- Earnings before interest, taxes, and depreciation (EBITD)
- Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR)
- Earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Gross profit
- Operating income before depreciation and amortization (OIBDA)
- EV/EBITDA on Investopedia.com
- The Hindu Business Line: How retail investors can profit from EV/EBITDA
- Slides on NYU Stern School of Business web site
- EBITDA:Challenging the Calculation by Lisa Smith on Investopedia
- A Clear Look At EBITDA by Ben McClure on Investopedia