What Is Considered a Healthy EV/EBITDA ?

The enterprise value (EV) to the earnings before interest, tax, depreciation, and amortization (EBITDA) ratio varies by industry. However, the EV/EBITDA for the S&P 500 has typically averaged from 11 to 14 over the last few years. EBITDA measures a firm's overall financial performance, while EV determines the firm's total value.

As of June 2018, the average EV/EBITDA for the S&P was 12.98. As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors. 

The enterprise-value-to-EBITDA ratio is calculated by:

• EV divided by EBITDA or earnings before interest, taxes, depreciation, and amortization
• EV (the numerator) is the company's enterprise value (EV) and is calculated as follows: 
• EV = Market Capitalization + Preferred Shares + Minority Interest + Debt – Total Cash

This popular metric is used as a valuation tool to compare the value of a company, debt included, to the company’s cash earnings less non-cash expenses. It's ideal for analysts and investors looking to compare companies within the same industry.

Typically, EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investors to determine companies with the healthiest EV/EBITDA within a specific sector.

Just like the P/E ratio (price-to-earnings), the lower the EV/EBITDA, the cheaper the valuation for a company. Although the P/E ratio is typically used as the go-to-valuation tool, there are benefits to using the P/E ratio along with the EV/EBITDA. For example, many investors look for companies that have both low valuations using P/E and EV/EBITDA and solid dividend growth.