The EV/EBITDA ratio or the enterprise multiple is a value metric which defines the relationship between a stocks enterprise value and the underlying earnings of the stock. EV is a measure of the companies value, it is more comprehensive than market capitalisation as it takes debt and cash holdings into account. EV can be considered the price an acquirer would have to pay in order to buy the company outright. EBITDA is earnings minus non-cash expenses. It is similar to free cash flow and is calculated using metrics found on the income statement and balance sheet. EBITDA gives investors a clear sense of the profitability of the stock over
A high EV/EBITDA could mean that a company is overvalued, a low EV/EBITDA could mean that a company is undervalued.
- We can compare a company’s EV/EBITDA to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s EV/EBITDA to its historical EV/EBITDA to gauge if it is cheaper vs. history.