What is Enterprise Multiple
Enterprise multiple, also known as the EBITDA multiple, is a ratio used to determine the value of a company. The enterprise multiple looks at a firm in the way a potential acquirer would by considering the company's debt, which other multiples (e.g., price-to-earnings [P/E] ratio) do not include.
Enterprise Multiple: My Favorite Financial Term
BREAKING DOWN Enterprise Multiple
To derive an enterprise multiple, analysts first need to find a company's enterprise value. The way to calculate enterprise value is as follows: (market capitalization) + (value of debt) + (minority interest) + (preferred shares) - (cash and cash equivalents). Then, the enterprise value number is divided by earnings before interest, taxes, depreciation, and amortization (EBITDA):
Implementation of Enterprise Multiples
Investors mainly use a company's enterprise multiple to determine whether a company is undervalued or overvalued. A low ratio indicates that a company might be undervalued and a high ratio indicates that the company might be overvalued.
An enterprise multiple is useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies. It's also used to find attractive takeover candidates since enterprise value includes debt and is a better metric than market cap for mergers and acquisitions (M&A). A company with a low enterprise multiple can be considered as a good takeover candidate.
Enterprise multiples can vary depending on the industry. It is reasonable to expect higher enterprise multiples in high-growth industries (e.g. biotech) and lower multiples in industries with slow growth (e.g. railways).
Example of an Enterprise Multiple
Because the enterprise multiple includes assets, debt and equity in its analysis, a company's enterprise multiple provides an accurate depiction of total business performance. Equity analysts use the enterprise multiple when making investment decisions.
For example, Denbury Resources Inc., a petroleum and natural gas company based in Texas, reported its first-quarter financial performance on June 24, 2016. Denbury Resources had an enterprise value-to-adjusted-EBITA ratio of 5x and a forward enterprise multiple of 13x. Both enterprise multiples were compared to other industry companies with past company multiples. The company's forward enterprise multiple of 13x was more than double the enterprise value from the same period in 2015. Analysts found that the increase was due to an expected decline in the company's EBITDA by 62%.