Investment Valuation Ratios: Enterprise Value Multiple
  1. Investment Valuation Ratios: Introduction
  2. Investment Valuation Ratios: Per Share Data
  3. Investment Valuation Ratios: Price/Book Value Ratio
  4. Investment Valuation Ratios: Price/Cash Flow Ratio
  5. Investment Valuation Ratios: Price/Earnings Ratio
  6. Investment Valuation Ratios: Price/Earnings To Growth Ratio
  7. Investment Valuation Ratios: Price/Sales Ratio
  8. Investment Valuation Ratios: Dividend Yield
  9. Investment Valuation Ratios: Enterprise Value Multiple

Investment Valuation Ratios: Enterprise Value Multiple

By Richard Loth (Contact | Biography)

This valuation metric is calculated by dividing a company's "enterprise value" by its earnings before interest expense, taxes, depreciation and amortization (EBITDA).

Overall, this measurement allows investors to assess a company on the same basis as that of an acquirer. As a rough calculation, enterprise value multiple serves as a proxy for how long it would take for an acquisition to earn enough to pay off its costs (assuming no change in EBITDA).

Formula:


Components:

Market Capitalization
($67.44 x 247.8 MM)
$16,712
-- --
Debt 82
Minority Interest 2
-- $16,796
Less Cash/Cash Equivalents (233)
Enterprise Value $16,563


Enterprise

value is calculated by adding a company's debt, minority interest, and preferred stock to its market capitalization (stock price times number of shares outstanding). The data for Zimmer Holdings' enterprise value and earnings before interest, taxes, depreciation and amortization (EBITDA) were obtained from its stock quote, income statement and balance sheet as of December 31, 2005. By simply dividing, the equation gives us the company's enterprise multiple of 15.7, which means that it would take roughly 16 years for earnings (assuming EBITDA doesn't change) to pay off the acquisition cost of Zimmer Holdings.

Variations:
None

Commentary:
Enterprise value, also referred to as the value of the enterprise, is basically a modification of market capitalization, which is determined by simply multiplying a company's number of shares outstanding by the current price of its stock. Obviously, a company's stock price is heavily influenced by investor sentiment and market conditions, which, in turn, will be determined by a company's market-cap value.

On the other hand, a company's enterprise value, which is the metric used by the acquiring party in an acquisition, is a term used by financial analysts to arrive at a value of a company viewed as a going concern rather than market capitalization. For example, in simple terms, long-term debt and cash in a company's balance sheet are important factors in arriving at enterprise value - both effectively serve to enhance company's value for the acquiring company.

As mentioned previously, enterprise value considerations seldom find their way into standard stock analysis reporting. However, it is true that by using enterprise value, instead of market capitalization, to look at the book or market-cap value of a company, investors can get a sense of whether or not a company is undervalued.

For more information on acquisitions, see The Basics Of Mergers And Acquisitions, Mergers And Acquisitions - Another Tool For Traders and The Wacky World of M&As.

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  1. Investment Valuation Ratios: Introduction
  2. Investment Valuation Ratios: Per Share Data
  3. Investment Valuation Ratios: Price/Book Value Ratio
  4. Investment Valuation Ratios: Price/Cash Flow Ratio
  5. Investment Valuation Ratios: Price/Earnings Ratio
  6. Investment Valuation Ratios: Price/Earnings To Growth Ratio
  7. Investment Valuation Ratios: Price/Sales Ratio
  8. Investment Valuation Ratios: Dividend Yield
  9. Investment Valuation Ratios: Enterprise Value Multiple
RELATED TERMS
  1. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  2. Enterprise Multiple

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  3. Relative Value

    A method of determining an asset's value that takes into account ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  5. Enterprise Mobility

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  6. EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

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RELATED FAQS
  1. How is it possible for a company to have a negative enterprise value?

    Learn about enterprise value and how value investors use it to find good companies with undervalued stocks. Negative enterprise ... Read Answer >>
  2. What's the difference between enterprise value and market capitalization?

    Learn the difference between two commonly utilized valuation tools: market capitalization and enterprise value, and see how ... Read Answer >>
  3. What is the difference between enterprise value and equity value?

    Valuating a business accurately depends heavily on the purpose of the valuation. Learn how enterprise value and equity value ... Read Answer >>
  4. When consolidating financials, how do you calculate Enterprise Value in cases that ...

    Read about the impact of minority interests in the calculation of Enterprise Value in consolidation cases that involve minority ... Read Answer >>
  5. What is the difference between market capitalization and enterprise value?

    Understand the basics of market capitalization and enterprise value, how they measure company value and how they differ in ... Read Answer >>
  6. What metrics can be used to analyze a telecommunications company if they have very ...

    Learn which equity and enterprise value metrics are useful when analyzing a telecommunications company that has very low ... Read Answer >>

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