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How to use Enterprise Value / EBITDA ratio?

QuestionsCategory: Valuation QuadrantHow to use Enterprise Value / EBITDA ratio?
Thomas asked 5 years ago

Hi,
 
I came across this EV/EBITDA ratio when reading analyst reports. Could you explain more on what this ratios about and how this can be use in valuations?
 
Regards,
Thomas

Jieren Zheng replied 5 years ago

It is kinda like price to earnings ratio. An alternative valuation metric.

It stands for Enterprise Value over Earnings before Interest, Taxes and Amortisation.

It is useful to avoid distorting effects of different countries’ taxation. Usually used to find potential company for acquisitions/mergers.

Enterprise Value is given as
(market capitalization) + (value of debt) + (minority interest) + (preferred shares) – (cash and cash equivalents).
The value is then divided by earnings before interest, taxes, depreciation and amortization (EBITDA).

Notice that it includes debt in the calculation, instead of just using market cap, which would be a better gauge.

Thomas replied 5 years ago

Hi, thanks for sharing.. but how do you interpret the figures that you calculated using this EV/EBITDA? =)

Jieren Zheng replied 5 years ago

It is the same as various valuation metrics. The lower the better.

But of course, you’ll need to compare within their industries to see how low or high it actually is.

1 Answers
Victor Chng Staff answered 5 years ago

Hi Thomas,
 
Basically Jieren had explained everything about the ratio. 
 
Hi Jieren,
 
Good job in explanation :) 

Thomas replied 5 years ago

I see.. okay, Thanks!! =)

Jieren Zheng replied 5 years ago

Thank you for your compliments. I worried I missed out something ^^”

Thomas replied 5 years ago

We should have more discussion and make use of this like a forum..to share more and learn more… Thanks again Jieren Zheng!! =)

Jieren Zheng replied 5 years ago

Yup. Welcome!