What is EV to EBITDA Multiple
The following articles provide an outline of EV to EBITDA Multiple. Enterprise value, as the name suggests, measures the total value of the company. Enterprise value is determined by considering the debt as well as any liquid cash available in the companies’ balance sheet. Enterprise valuation helps to understand whether the company is capable of any business takeover or not. Enterprise value helps the investors to decide on their investment plans.
The full form of EBITDA is Earning Before Interest, Taxes, Depreciation, and Amortization. The EBITDA is calculated to evaluate the company’s financial strength before clearing the dues of the company. The investors can decide by checking the EBITDA value because it is free from any financial and taxation decisions that manipulate the earnings to a greater extent.
Formula
The Enterprise Value to EBITDA multiple is calculated by dividing the Enterprise value with EBITDA.
How to Calculate EV to EBITDA Multiple?
The Enterprise multiple is calculated by calculating the enterprise value with the help of the following formula, and then the EBITDA is calculated. Then Enterprise value is divided with the EBITDA value to get the Enterprise Multiple.
- EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization.
Uses and Importance of EV to EBITDA Multiple
- It helps the investors who are planning to invest in the company since it provides the company’s true financial condition, and thus the investment decision is easy to make.
- The Enterprise Value to EBITDA multiple doesn’t consider the debts and thus shows the exact outcome.
- The calculation of EV to EBITDA multiple also acts as a valuation tool, and thus the benefit can be derived.
- In calculating the EV to EBITDA multiple, the EBITDA is calculated by considering the earnings before interest, taxes, depreciation, and amortization; thus, it helps to make the investors understand the company’s financial status is before paying the debts.
- The expert analysts have proved that the EV to EBITDA Multiple is better than the Price to earnings ratio. The Price to earnings ratio gives the equity multiple, whereas the EV to EBITDA Multiple helps to find out the entire valuation of the company with respect to market capitalization.
- It helps to determine and compare the valuation of the company.
- It also helps to make the investors aware of the company’s future prospects in terms of revenue.
- It can help the company improve because the other company in the same domain also releases the EV to EBITDA multiple of their company. Thus, they can easily improvise themselves.
- It plays a vital role for the investors to decide upon the investment.
- The EV to EBITDA multiple consists of Market capitalization, minority interest, preference shares, debts, and the cash is then deducted with the enterprise value, and thus it is an ideal method to do the comparison.
Advantages of EV to EBITDA Multiple
- It helps to make the investors in decision making because it provides a true picture of the company in respect of finance.
- It doesn’t consider the debts and the other incidental expenses related to the company, giving a true picture of the company.
- Higher EV to EBITDA multiple is considered good for the company also for the investors because the investors can get maximum return from that company.
- Investors use this EV to EBITDA multiple to evaluate whether the company is overvalued as compared to the other company in the industry.
- It also provides a deep understanding of the earnings, which is other than its debts and other incidental costs.
- It helps to improve the companies condition because it provides the exact condition of the company.
- It is considered better than the Price-earnings Ratio since the price-earnings ratio only focuses on the equity, whereas the EV to EBITDA multiple focuses on the earnings.
Drawbacks of EV to EBITDA Multiple
- The EV to EBITDA multiple has few drawbacks; the EV to EBITDA multiple doesn’t consider the incidental cost, which is not considered practical.
- It can show incorrect values to the investors because the incidental cost is very huge; therefore, it is not relevant sometimes for the investors to include the EV to EBITDA multiple in their decision making.
- It is also related to the past trends, and thus the effect of the valuation will not be so effective.
- The EV to EBITDA multiple can sometimes mislead the investors.
- The debts and the incidental costs are different for a different company, and therefore the comparison which is usually done in the industry can mislead the investors.
- It cannot be considered solely for investment purposes because many elements are not considered in this method.
Conclusion
It is calculated by dividing the Enterprise value with the EBITDA. The enterprise value consists of market capitalization, all the minority interest, preference shares, etc., which will form the value of the company and then the value is divided with the EBITDA to get the Enterprise Value to EBITDA multiple. This multiple is very helpful for the investors to decide on the investment in the company whose Enterprise value they are considering. The EV to EBITDA multiple has a drawback; it does not consider the incidental cost in their calculation which is practically not possible. The earnings should be shown and taken into consideration after paying off all the debts and also it has been seen that some big companies have great incidental cost and thus, in that case, if the decision of investing will be made entirely on the Enterprise Value to EBITDA multiple then it can be very risky.
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