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.
The EV/EBITDA Multiple
The enterprise-value-to-EBITDA ratio is calculated by:
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.
Benefits of EV/EBITDA Analysis
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.