Enterprise value/EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.
An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt.
The EV/EBITDA multiple requires prudent use for companies with low profit margins (i.e., for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability).
Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest (i.e., as a benchmark). An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.
The reciprocate multiple EBITDA/EV is used as a measure of cash return on investment.
The origin of the EV/EBITDA ratio coincided with the Asian auctioning of GSM licences for mobile services in 1997-1999. New GSM mobile operators in Asia had to take on significant debt to pay for licences and capex needed to roll out the infrastructure.
CLSA's Regional Telecoms Research Team headed by E. Lee pioneered the adoption of the EV/Ebitda ratio in Asia Pacific, while Deputy Head O. Silva conceived the valuation metric of (EV/Ebitda - to- Ebitda CAGR; see PEG ratio). Silva cautioned that the use of EV/Ebitda ratios should be restricted to infrastructure type projects where heavy capex requirements are front-loaded before services can go live.
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- EV/EBITDA on Investopedia.com
- The Hindu Business Line: How retail investors can profit from EV/EBITDA
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- EBITDA:Challenging the Calculation by Lisa Smith on Investopedia
- A Clear Look At EBITDA by Ben McClure on Investopedia