A:

The enterprise-value-to-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. As of the end of 2017, the average EV/EBITDA for the S&P was 12.75. As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors. 

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 noncash 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), a lower 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.

RELATED FAQS
  1. Which metric should I pay more attention to, EV/EBITDA or P/E?

    Examine and compare the relative advantages and disadvantages of the two equity evaluation metrics, EV/EBITDA and the price-to-earnings ... Read Answer >>
  2. How do I calculate the P/E ratio of a company?

    The P/E ratio shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares ... Read Answer >>
  3. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  4. What is the average price-to-earnings ratio in the drugs sector?

    Learn what the average price-to-earnings ratio is for companies operating in the drugs sector and why this metric is important ... Read Answer >>
Related Articles
  1. Investing

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  2. Investing

    Are stocks with low P/E ratios always better?

    Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends.
  3. Investing

    Getting On The Right Side Of The P/E Ratio Trend

    Buying at the right time is crucial, but how do we know when that is?
  4. Investing

    The 4 basic elements of stock value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  5. Investing

    Explaining Forward Price-to-Earnings Ratio

    The estimated P/E of a company is often used to compare current earnings to estimated future earnings.
  6. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. Comparable Company Analysis - CCA

    A process used to evaluate the value of a company using the metrics ...
  3. P/E 10 Ratio

    The P/E 10 ratio is a valuation measure, generally applied to ...
  4. Relative Valuation Model

    A business valuation method that compares a firm's value to that ...
  5. Valuation Analysis

    A valuation analysis is a process to estimate the approximate ...
  6. Multiples Approach

    The multiples approach is a valuation theory based on the idea ...
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center