EV/EBITDA

Enterprise value divided by EBITDA - the most common multiple for comparing whole businesses, because both parts are calculated before the effects of borrowing.

Example

Two businesses with identical operations, one with 10,000,000 of debt and one with none, both price at 10.0 times enterprise value to operating profit while their price-to-earnings ratios differ by 28.6%.

Important

It is comparable across companies with different borrowing, which is exactly what the price-to-earnings ratio is not. It still ignores capital spending, so it flatters asset-heavy businesses.

Related terms

• Enterprise value — The value of the whole business - what lenders and owners together have claims on. Equity value plus net debt.
• EBITDA — Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.
• Price-to-earnings ratio — The price of a share divided by the earnings attributable to it. An equity multiple, because both parts are measured after interest has been paid.

Lessons that explain it

• The entry multiple is set by auctions, and the fund's value by its own appraisals — Buyouts are priced as a multiple of earnings in competitive sales, and between purchase and exit the fund's value rests on appraisals that move far more smoothly than markets. (11 min)
• Appraising one company: the figures, and the growth already in the price — A practical pass over one listed business - what it earns, what it owes, what cash it keeps, and what the current price is already assuming. (14 min)
• Comparables and multiples: what the market is already paying — A multiple is not a shortcut past valuation. It is somebody else's valuation, compressed into one number, and using it means inheriting every assumption inside it. (12 min)

All 578 terms in the Investing glossary