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What is an 'Enterprise Multiple'

An enterprise multiple is a ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, taking into account the company's debt, which other multiples like the price-to-earnings (P/E) ratio do not include. The multiple, also known as the EBITDA multiple, is calculated as:

Enterprise Multiple

Also known as the EBITDA Multiple.

BREAKING DOWN 'Enterprise Multiple'

However, 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), as outlined above.

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 therefore a better metric than market cap for mergers and acquisitions (M&A). A company with a low enterprise multiple can be viewed as a good takeover candidate.

Enterprise multiples can vary depending on the industry. Compare the multiple to other companies within the industry or to the average industry in general. Expect higher enterprise multiples in high-growth industries, such as biotech, and lower multiples in industries with slow growth, such as 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.

Analysts derived and analyzed the company's enterprise multiple. Denbury Resources had an enterprise value-to-adjusted-EBITA ratio of 5x. It had a forward enterprise multiple of 13x. Both of these enterprise multiples were compared to other companies within the industry and 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%.

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