What Is EBITDA/EV Multiple?
I'm going to explain the EBITDA/EV multiple directly to you—it's a financial ratio that measures a company's return on investment, or ROI. You might prefer this over other return measures because it normalizes differences between companies. By using EBITDA, it accounts for variations in capital structure, taxation, and fixed asset accounting, and enterprise value does the same for capital structure differences.
Don't mix this up with EV/EBITDA, which is more common and used to check if a company is under or overvalued against peers.
Understanding EBITDA/EV Multiple
Let me break this down for you: the EBITDA/EV multiple modifies the ratio of operating and non-operating profits to the market value of a company's equity plus its debt. You calculate it by dividing the company's EBITDA—earnings before interest, taxes, depreciation, and amortization—by its enterprise value.
This multiple compares the company's operating profitability, via EBITDA, to its overall enterprise value. Since EBITDA acts as a proxy for cash income, it measures the company's cash return on investment.
It uses the business's cash flows to evaluate its value, and generally, healthy cash flow means a higher value. Calculating EBITDA/EV is more involved than other return measures, but it's preferred for providing a normalized ratio to compare different companies' operations.
If you used something more conventional like net income to equity, comparisons would get skewed by each company's accounting policies. As an analyst, you'd assume this ratio applies across similar companies in the same industry, allowing you to value one firm based on another. That's why EBITDA/EV is common for industry comparisons.
What Is A Good EBITDA/EV Multiple?
You use the EBITDA/EV multiple to compare similar companies in the same industry or sector—it doesn't mean much alone. Whether it's good or bad depends on the industry and peers' multiples.
Expect higher multiples in some industries than others. In general, a higher multiple is better, as it shows the company's operating profitability is stronger compared to its value.
EBITDA and EV
The multiple consists of two parts: EBITDA and EV. Let me cover EBITDA first—it's earnings before interest, taxes, depreciation, and amortization, a key profitability measure and alternative to net income. It excludes those items to represent cash profit from operations.
EBITDA gets some criticism because it's not GAAP and can be calculated differently, sometimes flattering profits. But many investors like it over net income since it avoids distortions from taxes and capital structure, making comparisons easier and better for cash flow assessment.
Now, enterprise value, or EV, measures a company's economic value, often used for acquisition valuation. It's better than market cap because it includes debt along with equity.
You calculate EV as market capitalization plus debt, preferred stock, and minority interest, minus cash. If acquiring, you'd pay equity value, assume debt, but cash reduces the effective price.
Example of EBITDA/EV
Take Wal-Mart Inc. for fiscal year 2024: its EBITDA was $40.93 billion, enterprise value $501.23 billion, giving an EBITDA/EV multiple of 0.08166 or 8.17%.
Compare that to Target over a similar period: EBITDA of $8.72 billion, enterprise value $81.32 billion, resulting in 0.10723 or 10.72%.
How Is EBITDA/EV Calculated?
You calculate the EBITDA/EV multiple by dividing the company's annual EBITDA—current or forecasted—by its enterprise value. It's the inverse of EV/EBITDA, which is popular for spotting undervalued or overvalued companies against peers.
What Does EV and EBITDA Stand For?
EV stands for enterprise value, and EBITDA is earnings before interest, taxes, depreciation, and amortization.
What Is Coca Cola's EBITDA/EV Multiple?
As of August 21, 2024, Coca Cola's EBITDA/EV multiple is 4.81.
The Bottom Line
The EBITDA/EV multiple is one of several ratios for assessing and valuing companies. It uses normalized figures for better comparability and examines the link between cash profits and valuation. A good multiple varies by industry, but higher is generally better, indicating stronger profitability relative to value.
Key Takeaways
- The EBITDA/EV multiple is a financial valuation ratio used to calculate a company's ROI.
- The multiple is often preferred over similar earnings analysis because it uses normalized ratios, which makes comparisons more effective.
- Since EBITDA is often considered a proxy for cash income, the metric is used as a measure of a company's cash return on investment.
- The EBITDA/EV multiple is used to compare similar companies operating in the same industry or sector and means little in isolation.
- Generally, a higher multiple is more desirable.
Other articles for you
An offsetting transaction cancels the effects of an existing position in financial markets like options and futures.
The P/E 10 ratio is a long-term stock valuation metric using averaged, inflation-adjusted earnings over 10 years to assess market overvaluation.
The Human Development Index (HDI) is a UN tool that ranks countries based on health, education, and income to assess human well-being beyond just economic growth.
A national currency is legal tender issued by a country's central bank, serving as the primary medium for exchanges and sometimes influencing global economies.
The Dividends Received Deduction (DRD) allows U.S
A financial asset is a non-physical, liquid asset deriving value from ownership claims or contractual rights, such as cash, stocks, and bonds.
A whitewash resolution is a shareholder-approved condition where a target company pledges financial assistance to an acquirer while ensuring its solvency for at least 12 months.
Bear Stearns was a major investment bank that collapsed in 2008 due to exposure to toxic mortgage-backed securities and was acquired by JPMorgan Chase.
The free rider problem happens when people benefit from shared resources without paying their fair share, leading to underproduction of those resources.
An internal auditor is a company employee who evaluates and improves financial controls and processes to ensure accuracy, efficiency, and regulatory compliance.