EV/EBITDA (2024)

Enterprise Value over Earnings Before Interest Taxes Depreciation & Amortization

What is EV/EBITDA?

EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses.

In this guide, we will break down the EV/EBTIDA multiple into its various components and walk you through how to calculate it step by step. Learn more in CFI’s Business Valuation Techniques course.

What is the EV/EBITDA Multiple Used For?

The ratio of EV/EBITDA is used to compare the entire value of a business with the amount of EBITDA it earns on an annual basis. This ratio tells investors how many times EBITDA they have to pay, were they to acquire the entire business.

The most common uses of EV/EBITDA are:

What is EV?

EV stands for Enterprise Value and is the numerator in the EV/EBITDA ratio. A firm’s EV is equal to its equity value (or market capitalization) plus its debt (or financial commitments) less any cash (debt less cash is referred to as net debt).

To learn more, see our guide to Enterprise Value vs Equity Value.

What is EBITDA?

EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. It often used in valuation as a proxy for cash flow, although for many industries it is not a useful metric.

To learn more, read our Ultimate Cash Flow Guide.

EV/EBITDA in a Comps Table

The most common way to see the EV/EBITDA multiple displayed is in a comparable company analysis (referred to as Comps for short).

Below is an example of the EV/EBITDA ratios for eachof the 5 companies in the beverage industry. As you will see by the red lines highlighting the relevant information, by taking the EV column and dividing it by the EBITDA column, one arrives at the EV/EBITDA column.

Pros and Cons of EV/EBITDA

There are many pros and cons to using this ratio. As with most things, whether or not it is considered a “good” metric depends on the specific situation.

Pros include:

Easy to calculate with publicly available information
Widely used and referenced in the financial community
Works well for valuing stable, mature businesses with low capital expenditures
Good for comparing relative values of different businesses

Cons include:

May not be a good proxy for cash flow
Does not take into account capital expenditures
Hard to adjust for different growth rates
Hard to justify observed “premiums” and “discounts” (mostly subjective)

To learn more about valuation multiples, check out our business valuation fundamentals course.

How to Learn to Calculate EV/EBITDA

The best way to learn is by doing. If you want to calculate Enterprise Value to EBITDA ratios for a group of companies, follow these steps and try on your own.

10 steps to calculate EV/EBITDA and value a company:

Pick an industry (i.e. the beverage industry, as in our example)
Find 5-10 companies that you believe are similar enough to compare
Research each company and narrow your list by eliminating any companies that are too different to be comparable (i.e. too big/small, different product mix, different geographic focus, etc.)
Gather 3 years of historical financial information for each company (i.e. revenue, gross profit, EBITDA, and EPS)
Gather current market data for each company (i.e. share price, number of shares outstanding, and net debt)
Calculate the current EV for each company (i.e. market capitalization plus net debt)
Divide EV by EBITDA for each of the historical years of financial data you gathered
Compare the EV/EBITDA multiples for each of the companies
Determine why companies have a premium or discounted EV/EBITDA ratio
Make a conclusion about what EV/EBITDA multiple is appropriate for the company you’re trying to value

EV/EBITDA Calculator

Download CFI’s free EV to EBITDA Excel Template to calculate the ratio and play with some examples on your own.

The above template is designed to give you a simple example of how the math on the ratio works and to calculate some examples yourself!

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EV/EBITDA Template

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More Valuation Resources

We hope this has been a useful guide to calculating Enterprise Value to EBITDA and better understanding the various pros and cons of using this valuation multiple. At CFI, we’re on a mission to help you advance your career, and with that in mind, we’ve created these additional resources to help you on your path to becoming a world-class financial analyst.

Relevant resources include:

FAQs

What is considered a good EV Ebitda ratio? ›

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.

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Why not use EV Ebitda? ›

EV/EBITDA does not include capital expenditures, which helps show accurate earnings and value. However, excluding capital expenditures in some industries can severely warp the metric.

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How do you calculate fair value using EV Ebitda? ›

Gather current market data for each company (i.e. share price, number of shares outstanding, and net debt) Calculate the current EV for each company (i.e. market capitalization plus net debt) Divide EV by EBITDA for each of the historical years of financial data you gathered.

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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.

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What percentage of EBITDA is good? ›

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.

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Do you want a high or low EV Ebitda? ›

The thumb rule is that a company with lower EV/EBITDA is more attractive. The condition is that the debt should not be high-cost debt and the equity must be fairly valued in the market.

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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 a good multiple of EBITDA? ›

An EV/EBITDA multiple of about 8x can be considered a very broad average for public companies in some industries, while in others, it could be higher or lower than that.

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Why do you never use equity value EBITDA? ›

Similarly, an Equity Value/EBITDA multiple is meaningless because the numerator applies only to shareholders, while the denominator accrues to all holders of capital.

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What does enterprise value to Ebitda tell you? ›

EV/EBITDA is a financial ratio that is commonly used to evaluate a company's value and performance. It measures the relationship between a company's enterprise value (EV) and its earnings before interest, taxes, depreciation, and amortization (EBITDA). The ratio is calculated by dividing a company's EV by its EBITDA.

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Why can't you use equity value EBITDA? ›

You can't use Equity Value / EBITDA as a multiple because you are comparing apples to oranges. This is because EBITDA is available to all investors in the company (both equity and debt holders). Equity Value, on the other hand, is only available to equity investors, so it doesn't make sense to pair them together.

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Why use EV Ebitda for valuation? ›

One advantage of the EV/EBITDA ratio is that it strips out debt costs, taxes, depreciation, and amortization, thereby providing a clearer picture of the company's financial performance.

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Why is EV Ebitda better than PE? ›

Contrasts: EV/EBITDA is often preferred in mergers and acquisitions due to its comprehensive view, whereas the P/E ratio is frequently used for evaluating a company's attractiveness to investors. Incorporation of Growth Expectations:Parallels: Both ratios implicitly incorporate expectations for future earnings growth.

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What is an example of EV Ebitda multiple? ›

For example, Wal-Mart Inc.'s EBITDA for the fiscal year 2020, was $31.55 billion. Its enterprise value was $445.77 billion during this period. This works out to an EBITDA/EV multiple of 0.07077 or 7.08%. The reciprocate multiple EV/EBITDA is used to measure the value of a company.

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Is it better to have a higher or lower EV EBITDA? ›

In general, a higher EBITDA multiple is considered better when evaluating a company's valuation. The EBITDA multiple, also known as the EBITDA ratio or valuation multiple, is calculated by dividing the enterprise value (EV) of a company by its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Is a high EV EBIT ratio good? ›

Key Takeaways

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 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.

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