What is EV/EBITDA
The EV/EBITDA ratio is a popular valuation metric that is used for estimating business valuation. It compares the price (or market cap) of the company adjusting for cash, debt and other liabilities compared to the earnings. It is a more advanced version of the PE ratio as it takes into account the company cash and debt situation.
How to calculate EV/EBITDA (formula)
The formula for calculating enterprise multiple is:
Enterprise multiple = EV / EBITDA
Where EV or enterprise value is calculated as taking the market equity value (market cap) plus its debt (total debt) less any cash.
Enterprise value (EV) = Market cap + total debt - cash
The enterprise value measures the value of a company’s business instead of only measuring the market value of the company. In a way is calculating how much it would cost to buy the business free of its debts and liabilities.
The EBITDA stands for earnings before interests, taxes, depreciation and amortisation. It often used in valuation as a proxy for cash flow.
What is a good EV/EBITDA
Since EV/EBITDA is a valuation metric, lower enterprise multiple can be indicative of the company being undervalued. Usually, EV/EBITDA values below 10 are seen as desirable (undervalued). However it’s better when the enterprise multiple is used to compare the value of one company to the value of another company within the same industry and sector as multiple averages generally differ depending on the sector and industry.
Stocks with low EV/EBITDA ratio
You can also check the EV/EBITDA by industry analysis.
Why is EV/EBITDA important
The EV/EBITDA ratio tells investors how many times EBITDA they have to pay if they where to acquire the whole business. It’s a good way to compare relative values of different businesses especially when evaluating stable and mature businesses. Since the ratio is not affected by capital structure changes (unlike PE ratio) it makes it possible to do a more fair comparison of companies with different capital structures.
One of the main downsides is that this ratio does not take into account growth rates and growth potential of the business and since it uses EBITDA does not adjust for capital expenditures which depending on the industry can be an important expense.
FAQs
Typically, when evaluating a company, an EV/EBITDA value below 10 is seen as healthy. It's best to use the EV/EBITDA metric when comparing companies within the same industry or sector.
Do you want a high EV EBIT ratio? ›
The higher the EBIT/EV multiple, the better for the investor as this indicates the company has low debt levels and higher amounts of cash. The EBIT/EV multiple allows investors to effectively compare earnings yields between companies with different debt levels and tax rates, among other things.
What should be ideal EBITDA ratio? ›
A good EBITDA margin is relative because it depends on the company's industry, but generally an EBITDA margin of 10% or more is considered good. Naturally, a higher margin implies lower operating expenses relative to total revenue, while a low or below-average margin indicates problems with cash flow and profitability.
What is a healthy EV revenue ratio? ›
EV-to-sales multiples are usually found to be between 1x and 3x. Generally, a lower EV/sales multiple will indicate that a company may be more attractive or undervalued in the market.
Is it better to have a higher or lower EV EBITDA ratio? ›
What is a Good EV/EBITDA Ratio? Generally, the lower the EV to EBITDA ratio, the more attractive the company may be as a potential investment.
What is Apple's EV EBITDA ratio? ›
As of 2024-04-07, the EV/EBITDA ratio of Apple Inc (AAPL) is 20.7. EV/EBITDA ratio is calculated by dividing the enterprise value by the TTM EBITDA. Apple's latest enterprise value is 2,685,914 mil USD. Apple's TTM EBITDA according to its financial statements is 129,935 mil USD.
Can you have a negative EV EBITDA ratio? ›
If EBITDA is negative, then having a negative EV/EBITDA multiple is not useful. Similarly, a company with a barely positive EBITDA (almost zero) will result in a massive multiple, which isn't very useful either.
What does EBITDA multiple tell you? ›
The EBITDA multiple, also known as enterprise multiple, is a formula for calculating a financial ratio that compares the enterprise value of a business to its annual earnings before interest, taxes, depreciation and amortisation (EBITDA). This ratio is the enterprise multiple.
What is an attractive EBITDA margin? ›
The formula to calculate the EBITDA margin divides EBITDA by net revenue in the corresponding period. A “good” EBITDA margin is industry-specific, however, an EBITDA margin in excess of 10% is perceived positively by most.
What if EBITDA is too high? ›
A too-high EBITDA could translate to a very high sales price that makes your business unattractive or uncompetitive. This could price you out of the market and make other dealerships, with their lower EBITDAs and lower sales prices, look like better values as acquisitions.
The total EBITDA margin will be around 10%. The EBITDA margin shows how much operating expenses are eating into a company's gross profit. In the end, the higher the EBITDA margin, the less risky a company is considered financially.
What is the 80% rule for EV? ›
The 20-80% rule recommends maintaining your EV's battery charge between 20% and 80% of its total capacity. It's a simple yet effective practice designed to enhance battery life – consider it the green zone for your EV.
What is the average EV EBITDA for the healthcare industry? ›
In the United States, the average value of enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) in the health and pharmaceuticals sector as of 2023 was a multiple of approximately 13.7x.
What is a good EV to revenue multiple? ›
While the measure of a good EV/R multiple is different across companies, it's often between 1x and 3x. EV/R is a numeral with an "x" because it's a multiple, and it expresses the value of a company in proportion to its revenue.
What is a high EV to EBITDA? ›
Conversely, a high EV/EBITDA ratio implies that the market values the company at a higher multiple of its earnings. This could indicate that the company is potentially overvalued, as investors are willing to pay a premium for the company's expected future earnings or growth prospects.
What is Pfizer's EV EBITDA ratio? ›
Pfizer's ev / ebitda for fiscal years ending December 2019 to 2023 averaged 15.1x. Pfizer's operated at median ev / ebitda of 11.9x from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Pfizer's ev / ebitda peaked in December 2020 at 29.1x.
