EV/EBITDA

EV/EBITDA compares the value of the whole business, including debt, with a measure of its operating earnings before financing costs, taxes and non-cash charges. This makes it one of the most widely used multiples for comparing companies.

For example, a company with an enterprise value of 2,300 million and EBITDA of 250 million has an EV/EBITDA multiple of 9.2.

Because both enterprise value and EBITDA are unaffected by how a company is financed, EV/EBITDA allows fair comparisons between companies with different levels of debt. It also reduces distortions from different depreciation policies and tax rates, which is useful when comparing companies across countries.

The multiple is widely used in mergers and acquisitions, private equity and comparable company analysis. Its limitation is that EBITDA ignores capital expenditure, working capital needs and taxes, which all require real cash. Businesses that need heavy ongoing investment, such as telecoms or airlines, may look cheaper on EV/EBITDA than they really are.

Note: The enterprise value multiple, sometimes called the enterprise multiple, usually refers to EV/EBITDA. Some analysts use the phrase more broadly for any multiple based on enterprise value.