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).
($67.44 x 247.8 MM)
|Less Cash/Cash Equivalents||(233)|
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.
Click here to return to the Financial Ratio Tutorial main menu.
InvestingThe enterprise multiple is a ratio used to value a company as if it was going to be acquired.
InvestingThis simple measure can help investors determine whether a stock is a good deal.
InvestingEnterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
Financial AdvisorLearn how enterprise value can help investors compare companies with different capital structures.
Personal FinanceThere’s a few things to know before interviewing for an investment-banking job.
InvestingThis measure has its benefits, but it can also present earnings through rose-colored glasses.
InvestingThis measure has a bad rap, but it's still a valuable tool when used appropriately.
InvestingUncover the three things most good stocks have in common: performance, profitability and value.
InvestingLearn about the importance of capital structure, and what equity and debt capitalization measures can tell us about the performance of McDonald's Corporation.
InvestingLearn how enterprise value can help investors compare companies with different capital structures.