EV/EBIDTDA Multiple: What Is The EV EBITDA Ratio And Why Is It Important?

What is the EV to EBITDA multiple? How do you calculate it and with what formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about it.

What Is The EV to EBTIDA Multiple?

The EV/EBITDA multiple, also known as the enterprise multiple, is the ratio between the enterprise value and the EBITDA of a company. The valuation metric compares the debt-included value (the real value) of a company to its cash earnings. Investors and analysts typically use it to compare businesses within the same industry.

The enterprise multiple functions similarly to the P/E ratio, but it is more useful when comparing business with varying degrees of financial leverage and valuing capital-intensive companies with abnormal levels of depreciation.

The P/E ratio is equal to a company's market capitalization divided by its net income, so it doesn't consider the company's total value and it isn't appropriate to estimate the value of a company with a high level of depreciation and amortization.

How To Calculate The EV/EBITDA Ratio: Formula Explained

As discussed above, the enterprise multiple is the ratio between the enterprise value and the earnings before interest, taxes, depreciation, and amortization of a company. Below is the EV to EBITDA formula:

EV / EBITDA.

The reciprocal is:

EBITDA/EV.

Let's break down the individual components of the formula:

Enterprise Value (EV): Enterprise Value (EV), also referred to as Business Enterprise Value (BEV), reflects the entire business's market value. In laymen's terms, it's the amount an acquirer would have to pay to buy a business. In valuation terms, enterprise value represents the market value of the company's total operating assets. It is equal to:

Market Capitalization.
(+) Total Debt.
(+) Minority Interest and Other Liabilities.
(+) Preferred Equity.
(-) Cash And Cash Equivalents.
(-) Short Term Investments.
(-) Long Term Investments.