How to Evaluate Enterprise Value to EBITDA

by Bryan Keythman ; Updated April 19, 2017

Enterprise value-to-EBITDA (EV/EBITDA) is a valuation metric that compares a company’s overall value to its earning power. A company’s enterprise value is its value as a whole, including the market value of its stock and the value of its debt. The amount of earnings before interest, taxes, depreciation and amortization (EBITDA) is an estimate of a company’s cash flow from its core business operations. You can use EV/EBITDA, or EV multiple, to compare the value of a company’s operations with the value of other companies.

Step 1

Visit any financial website that provides stock information and find a company’s market capitalization in its stock quote section. For example, assume a company’s market capitalization is $200 million.

Step 2

Find the company’s balance sheet and income statement in its 10-K annual report, which you can obtain from the “investor relations” section of its website or from the U.S. Securities and Exchange Commission’s EDGAR database.

Step 3

Find the amount of the company’s total liabilities and the amount of cash on its balance sheet. In this example, assume the company has $50 million in total liabilities and $30 million in cash.

Step 4

Add the company’s market capitalization and total liabilities. Then subtract its cash from your result to calculate its enterprise value. In this example, add $50 million and $200 million to get $250 million. Then subtract $30 million from $250 million to get an enterprise value of $220 million.

Step 5

Find the amount of the company’s net income, interest expense, income tax expense, depreciation expense and amortization expense on its income statement. In this example, assume the company has $20 million in net income, $9 million in interest expense, $10 million in income tax expense and $5 million in depreciation and amortization expenses.

Step 6

Add interest, income tax, depreciation and amortization expenses to net income to calculate EBITDA. In this example, add these amounts to get $44 million in EBITDA.

Step 7

Divide the company’s enterprise value by its EBITDA to calculate EV/EBITDA. Continuing the example, divide $220 million by $44 million to get an EV/EBITDA of 5. This means the company’s enterprise value is five times its EBITDA.

Step 8

Compare the company’s EV/EBITDA with those of its competitors and the industry average. A company with a lower EV multiple than its peers may be undervalued. A higher EV multiple suggests the company may be overvalued. In this example, if the company’s competitors have EV multiples of 7, 8 and 10, the subject company may be undervalued compared to its peers.

Step 9

Compare the company’s EV multiple over time. A growing EV multiple means the company’s value is increasing, while a diminishing EV multiple means its value is decreasing. In this example, if the company’s EV/EBITDA increases from 6 to 7.5, its value is increasing.

References


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how much does it cost for root canal and crowncash budget formatwestern union prepaid card numbersallie mae phone callsbuying a freddie mac foreclosurestock certificate legendbank account pending transactionsstock market candlestick chartscredit score needed to lease a carmeaning of subsidized housingalameda county deedeic income tablebroad market index fundam i tax exempt w4clark howard credit scorecraigslist free stuff orlando floridahow long does nicotine stay in blood life insurancehow long to get a mortgage commitment letterhow to track moneygram money transfertropicana scholarshipcumulative roitransfer food stamps to another countyquit claim deed ncsears crdit cardwhat is a liquid asset examplesgraduation gift ideas for classmateshsbc credit card statementstax credit for spousemutual savings credit unionappraisal value versus market valuesec 125 on w2credit card cscwhat does it mean to file taxes electronicallystock certificate lookupfannie mae reo agentincome limits for badgercarewill bankruptcy affect my partneraarpmedicarecompletecheck cashing krogerold reading glasses for charityspecial warranty deed texas divorcetransunion.com disputehow to transfer money from wells fargo to us bankarizona landlord tenant act evictionpaid-in capital in excess of stated valuepolice academy gifts for graduationaarp medicare advantage hmoformula for installment loancan u borrow from your 401ktrade for motorhomeare tolls tax deductiblestock commission calculatoreyemed provider locatorwalmart transfer agentamica insurance agenthardship letter for deed in lieuturbo tax form 1041walmart charitiesnon deductible ira contributionletter of reprimand exampleconcessional meaningscholarships for single mothers in illinoispell grant per semester or yearminnesota renters lawshow does late payment affect credit scoreincometax efilingcanadian tsx stock exchangeva table of disability ratingsfha income guidelineshow to treat abscess toothdefine acute medicalsulfamethoxazole for tooth infection
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