A:

The EV/EBITDA multiple for a company can be found by comparing the enterprise value, or EV, to the earnings before interest, taxes, depreciation and amortization, or EBITDA.

## The EV/EBITDA Multiple Ratio

The EV/EBITDA ratio is a metric widely used to help investors determine the value of a business. It compares a companyâ€™s value, including debt and liabilities, to the its true cash earnings, less noncash expenses. This metric is often used to compare values of companies that operate in the same industry. Lower values can be an indication a company has been undervalued. Generally, analysts interpret any EV/EBITDA value below 10 as positive; however, it is still important to consider the value in relation to EV/EBITDA values of similar firms.

## Calculating the EV/EBITDA

The name of the ratio essentially gives away the formula used for its calculation. To determine the value, the companyâ€™s enterprise value is divided by its earnings before interest, taxes, depreciation and amortization. Enterprise value is calculated as the company's total market capitalization plus debt and preferred shares, minus the company's total cash.

## Benefits of the Metric

The EV/EBITDA multiple is often used in conjunction with, or instead of, the price-to-earnings, or P/E, ratio. The former is sometimes considered a better valuation tool for potential investors because it is not affected by changes in a companyâ€™s capital structure and makes it possible to obtain fair comparisons of companies that have different capital structures. One other advantage of the multiple is it eliminates the effects of noncash expenses that are not typically a major consideration of investors.

RELATED FAQS
1. ### What metrics are most commonly used to evaluate companies in the electronics sector?

Learn what metrics are most commonly used to evaluate companies in the electronics sector and the specific qualities of each ... Read Answer >>
2. ### Enterprise value versus market capitalization

Learn the difference between market capitalization and enterprise value, and understand how these two common valuation tools ... Read Answer >>
3. ### What is the difference between market capitalization and market value?

Understand the difference between market capitalization and market value, including the elements used for the calculation ... Read Answer >>
Related Articles
1. Investing

### 3 Value Stocks Mutual Funds Are Underestimating (BRK-B, GE)

Learn why Goldman Sachs believes most mutual funds perform worse than their benchmark indexes. Discover three stocks many mutual funds have overlooked.
2. Investing

### How to Tell If a Stock is Over or Undervalued

These are the common valuation methods for stocks. But should you invest based on your financial goals and risk tolerance instead?
3. Investing

### How to value companies with negative earnings

For some investors, the possibility of stumbling upon a small biotech with a potential blockbuster drug, or a junior miner with a giant mineral discovery, makes the risk of investing in companies ...
4. Investing

### Analyzing the Price-to-Cash-Flow Ratio

Find out how analyzing the price-to-cash-flow ratio can help you make batter investment decisions.

### Facebook Stock: Capital Structure Analysis (FB)

Analyze Facebook's capital structure to identify trends and atypical characteristics. Find out why the company uses equity capital and carries no debt.
6. Investing

### Value Investing: Why Investors Care About Free Cash Flow Over EBITDA

Examine value investing philosophy and methodology to see why free cash flow is more important than EBITDA in pure intrinsic value calculation.
7. Investing

### Why Goldman Is Warning About Free Cash Flow Yield (GS)

Learn why Goldman Sachs is alerting investors to the importance of cash flow, and discover a recommended alternative equity valuation metric to free cash flow.
8. Investing

### Relative Valuation: Using Stocks To Value Other Stocks

This effective approach will help you understand which stocks you should be investing in.
9. Investing

### Alphabet Is the Most Compelling of the FANG Stocks

Alphabet Inc. is the cheapest of the FANG stocks and has plenty of room for upward movement.
10. Investing

### Market value versus book value

Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
RELATED TERMS
1. ### Comparable Company Analysis - CCA

A process used to evaluate the value of a company using the metrics ...
2. ### Enterprise Multiple

Enterprise multiple is a measure (the company's enterprise value ...
3. ### Valuation Analysis

A valuation analysis is a process to estimate the approximate ...
4. ### Relative Valuation Model

A business valuation method that compares a firm's value to that ...
5. ### EBITDA to sales ratio

A financial metric used to assess a company's profitability by ...
6. ### Forward Earnings

Forward earnings are an estimate of a next period's earnings ...
Hot Definitions
1. ### Leverage

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

Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
3. ### Enterprise Value (EV)

Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
4. ### Relative Strength Index - RSI

Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
5. ### Dividend

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
6. ### Inventory Turnover

Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.