While average EV/EBITDA values vary by sector and industry, a general guideline is an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors. As of 2015, the average EV/EBITDA value for the overall market is 14.7.
The EV/EBITDA Multiple
The name of this metric indicates the formula used in its calculation. The value of the metric is determined by dividing a company’s enterprise value (EV) by its earnings before interest, taxes, depreciation and amortization (EBITDA). The numerator of the formula, the EV, is calculated as the company’s total market capitalization and preferred shares and debt, minus total cash.
This popular metric is widely used as a valuation tool, allowing investors to compare the value of a company, debt included, to the company’s cash earnings less noncash expenses. It is ideal for analysts and potential investors looking to compare companies within the same industry. Typically, EV/EBITDA values below 10 are seen as healthy, but comparison of relative values among firms operating in the same industry is a good way for investors to determine companies with the healthiest EV/EBITDA within a specific sector.
Benefits of EV/EBITDA Analysis
Though the price-to-earnings, or P/E, ratio is often primarily used as a valuation tool, there are benefits to using it along with the EV/EBITDA, or to using the latter on its own. The EV/EBITDA is considered by some to be a better valuation metric because it remains unaffected by changing capital structures and offers fairer comparisons of companies with capital structures that differ. It also removes the effects of noncash expenses on a company’s value.
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