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What is 'EBITDA/EV Multiple'

The EBITDA/EV multiple is a financial ratio that measures a company's return on investment (ROI). The EBITDA/EV ratio may be preferred over other measures of return because it is normalized for differences between companies. Using EBITDA normalizes for differences in capital structure, taxation and fixed asset accounting. Meanwhile, using enterprise value (EV) also normalizes for differences in a company's capital structure.

BREAKING DOWN 'EBITDA/EV Multiple'

While computing this ratio is more complicated than other return measures, it is sometimes preferred because it provides a normalized ratio for comparing the operations of different companies. If a more conventional ratio (such as net income to equity) were used, comparisons would be skewed by each company's accounting policies. EBITDA/EV is commonly used to compare companies within an industry.

This is a modification of the ratio of operating and non-operating profits compared to the market value of a company's equity plus its debt. Since EBITDA is often considered a proxy for cash income, the metric is used as a measure of a company's cash return on investment.

Breaking It Down

"EBITDA" is an acronym that stands for earnings before interest, taxes, depreciation and amortization. However, the measure is not based on U.S. generally accepted accounting principles (GAAP). In April 2016, the Securities and Exchange Commission (SEC) stated non-GAAP measures such as EBITDA would be a focal point for the agency to ensure that companies are not presenting results in a misleading manner. If EBITDA is shown, the SEC advises that the company should reconcile the metric to net income. This should assist investors by providing information on how the figure is calculated.

Enterprise value (EV) is a measure of the economic value of a company. It is frequently used to determine the value of the business if it is acquired. It is considered to be a better reflection than market capitalization, since that is a calculation of only the equity without regard to the debt. EV is calculated as the market capitalization plus debt, preferred stock and minority interest, minus cash. An entity purchasing a company would have to pay the value of the equity and assume the debt, but the cash would reduce the price paid.

Example

Wal-Mart Stores Inc. had an enterprise value of $263.8 billion on June 7, 2016. Its EBITDA for the last 12 months, which ended with the first fiscal quarter that ended on April 30, 2016, was $33.2 billion. This works out to an EBITDA/EV multiple of 0.126, or 12.6%.

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