What EV/EBITDA tells you
Enterprise value estimates what it would cost to buy the whole business: its shares, plus its debt, less the cash that would come with it. It mixes a market figure with accounting figures. Market capitalization is the stock market’s value of the common shares and changes every trading day. Total debt and cash come from the latest balance sheet, and the debt is usually taken at its balance sheet amount as a stand-in for its market value.
EBITDA comes from the income statement, usually for the last twelve months. A result of 8.00 means the business is valued at eight times its annual EBITDA.
How enterprise value and EBITDA are defined
This calculator uses the simple form of enterprise value: market capitalization plus total debt minus cash and cash equivalents. Some analysts add other claims on the business, such as preferred shares, non-controlling interests or lease liabilities. Those versions give a higher enterprise value, and a higher multiple, for the same company. Check how any EV/EBITDA figure you compare with was built.
EBITDA is not defined by US GAAP or IFRS. Companies choose their own adjustments, and many publish an “adjusted EBITDA” that leaves out further items. Use EBITDA built the same way for every company you compare.
Reading a high or low result
Enterprise value counts lenders’ claims as well as shareholders’, and EBITDA is measured before interest. That makes the ratio less affected by how a company is financed than P/E is. EBITDA is also measured before depreciation and tax, so differences in depreciation policies and tax rates do not change EBITDA itself.
- A higher multiple can reflect expectations of growth, or EBITDA that is temporarily depressed.
- A lower multiple can reflect expectations of slower growth or higher risk, or a business that must spend heavily on equipment to keep earning its EBITDA.
Normal levels differ between industries and change over time, so compare with the company’s own history and with similar businesses. When EBITDA is zero or negative, the ratio is not meaningful and the calculator shows a message instead of a result.
What the ratio does not show
- EBITDA leaves out the cost of replacing equipment and other long-lived assets. In a capital-intensive business, EBITDA can be far higher than the cash left after that spending.
- Interest and tax still have to be paid, even though the ratio looks past them.
- The figures are from different dates: market capitalization moves daily, while debt and cash come from a balance sheet that may be months old.
Common mistakes
- Counting accounts payable or all liabilities as debt. Only interest-bearing borrowings belong in total debt here.
- Subtracting cash twice, by entering net debt as total debt and then entering cash as well.
- Comparing a multiple based on adjusted EBITDA with one based on unadjusted EBITDA.
- Using EBITDA for a single quarter against a value that reflects a full year of earnings.
Related measures
The EBITDA calculator builds EBITDA up from net income. EBITDA margin relates the same figure to revenue. EBIT vs EBITDA explains what adding back depreciation and amortization changes. The price-to-earnings ratio values only the shares, so it depends more on how much debt a company carries.