Enterprise value to EBITDA (EV/EBITDA)
What a buyer of the whole company, debt included, pays for one unit of earnings before interest, tax, depreciation and amortisation.
It compares companies with different debt loads and tax positions on the same footing, which the P/E cannot do.
How it is computed here
(Market capitalisation + total debt - cash) / EBITDA
Combines more than one basis. See the note. The pipeline prefers the data vendor's published trailing-twelve-month ratio when one exists, and falls back to recomputing from the latest filed fiscal year when it does not. Those two are different measurements: the vendor figure puts twelve months of flow over the most recent quarterly balance sheet. The source trail on each figure names which path produced it. Filed under value. Neither a high nor a low reading is good on its own, so it is never coloured as one.
The readings, and where the lines come from
| Range | Reading |
|---|---|
| below 8.00x | Cheap on a whole-company basis |
| 8.00x to 12.00x | Ordinary range |
| 12.00x to 18.00x | Full |
| 18.00x and above | Rich |
A practitioners’ convention, not an estimated boundary. Market convention in mergers and acquisitions rather than an estimated boundary; the bands describe where transaction multiples usually sit.
When it misleads
- EBITDA treats depreciation as if it were not a real cost. For anything that owns heavy assets it is a fiction: the machines wear out and have to be bought again.
- Enterprise value is not meaningful where debt is the raw material of the business, so this is withheld for banks and insurers.
Not meaningful for banks, insurers: the product prints n/m with the reason rather than a number for them.
Questions
How is enterprise value to ebitda calculated?
(Market capitalisation + total debt - cash) / EBITDA. Combines more than one basis. See the note. The pipeline prefers the data vendor's published trailing-twelve-month ratio when one exists, and falls back to recomputing from the latest filed fiscal year when it does not. Those two are different measurements: the vendor figure puts twelve months of flow over the most recent quarterly balance sheet. The source trail on each figure names which path produced it.
What does enterprise value to ebitda tell a value investor?
It compares companies with different debt loads and tax positions on the same footing, which the P/E cannot do.
When does enterprise value to ebitda mislead?
EBITDA treats depreciation as if it were not a real cost. For anything that owns heavy assets it is a fiction: the machines wear out and have to be bought again. Enterprise value is not meaningful where debt is the raw material of the business, so this is withheld for banks and insurers.