Enterprise Multiple

AAA

DEFINITION of 'Enterprise Multiple'

A ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. Enterprise multiple is calculated as:

Enterprise Multiple



Also known as the EBITDA Multiple.

INVESTOPEDIA EXPLAINS 'Enterprise Multiple'

A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several reasons:

1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies.

2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with a low enterprise multiple can be viewed as a good takeover candidate.

Keep in mind that enterprise multiples can vary depending on the industry. Therefore, it's important to compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in high growth industries (like biotech) and lower multiples in industries with slow growth (like railways).

RELATED TERMS
  1. Acquisition

    A corporate action in which a company buys most, if not all, ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for ...
  3. Earnings Before Interest, Taxes, ...

    An indicator of a company's financial performance which is calculated ...
  4. Enterprise Value - EV

    A measure of a company's value, often used as an alternative ...
  5. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  6. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
Related Articles
  1. Using Enterprise Value To Compare Companies
    Fundamental Analysis

    Using Enterprise Value To Compare Companies

  2. EBITDA: Challenging The Calculation
    Options & Futures

    EBITDA: Challenging The Calculation

  3. Understanding Oil Industry Terminology
    Budgeting

    Understanding Oil Industry Terminology

  4. Value Investing Using The Enterprise ...
    Fundamental Analysis

    Value Investing Using The Enterprise ...

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center