Enterprise Value Multiples
factor.formula
Enterprise Value/EBITDA Ratio Calculation Formula:
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Enterprise Value represents the total value of a company, including equity value (market value) and debt value (total debt). The calculation formula is: EV = Market Value + Total Debt - Cash and Cash Equivalents.
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Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is an indicator to measure the profitability of a company's core operations. The calculation formula is: EBITDA = operating profit + depreciation expenses + amortization expenses.
factor.explanation
The enterprise value/earnings before interest, taxes, depreciation and amortization ratio (EV/EBITDA) is a commonly used relative valuation indicator that reflects the market's pricing level of the company's overall value and its operating profitability. Compared with indicators such as the price-to-earnings ratio (P/E), EV/EBITDA can better reflect the overall value creation ability of the company and avoid differences in capital structure (such as leverage), tax policies, and non-cash expenses such as depreciation and amortization between different companies. EBITDA focuses on the company's core operating profitability, while EV includes all investors in the company, including equity investors and debt investors. This indicator is mainly used in the following aspects:
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Cross-industry comparison: Since the impact of interest, taxes and non-cash expenses is excluded, EV/EBITDA allows for more reasonable comparisons between companies in different industries.
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M&A valuation: In M&A transactions, EV/EBITDA is often used to evaluate the value of the target company because it better reflects the company's true operating performance.
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Value Assessment: Generally speaking, a lower EV/EBITDA multiple may mean that the company is undervalued, while a higher EV/EBITDA multiple may mean that the company is overvalued. However, the specific judgment still needs to be combined with the industry average, company growth, and other financial indicators for comprehensive analysis.
Notes:
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This indicator may have certain limitations for cyclical and capital-intensive industries because the EBITDA of these industries is more volatile.
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When comparing different companies, it is necessary to pay attention to the differences in their accounting policies, such as depreciation and amortization policies.
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This indicator should not be used as the only valuation basis, and should be combined with other valuation indicators (such as price-to-earnings ratio, price-to-book ratio) and qualitative analysis for comprehensive judgment.