The enterprise value (EV) to the earnings before interest, taxes, depreciation, and amortization(EBITDA) ratio varies byindustry. However, theEV/EBITDAfor the has typicallyaveraged between 11 and 16 over thelast few years. EBITDA measures a firm's overall financial performance, while EV determines the firm's total value.
As of Dec. 2021, the averageEV/EBITDA for the S&P 500was 17.12. As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.To gain a better understanding of how investors can use the EV/EBITDA metric to analyze stocks, we'll take a closer look at each component of the metric and discuss some of the metric's advantages.
Key Takeaways
The enterprise value to earnings before interest, taxes, depreciation, and amortization ratio (EV/EBITDA) compares the value of a company—debt included—to the company’s cash earnings less non-cash expenses.
The EV/EBITDA metric is a popular valuation tool that helps investors compare companies in order to make an investment decision.
EV calculates a company's total value or assessed worth, while EBITDA measures a company's overall financial performance and profitability.
Typically, when evaluating a company, an EV/EBITDA value below 10 is seen as healthy.
It's best to use the EV/EBITDA metric when comparing companies within the same industry or sector.
Investors and analysts use the enterprise value (EV) metric to calculate a company's total monetary value or assessed worth. While some investors simply look at a company's market capitalization to determine a company's worth, other investors believe the enterprise value metric gives a more complete picture of a company's true value. That's because the enterprise value also takes into consideration the amount of debt the company carries and its cash reserves.
Calculating Enterprise Value (EV)
To calculate enterprise value, determine the company's market capitalization by multiplying the company's outstanding shares by the current market price of one share. To this number, add the company's total long-term and short-term debt. Lastly, subtract the company's cash and cash equivalents. You now have the company's enterprise value.
This result shows how much money would be needed to buy an entire company. The enterprise value calculates the theoretical takeover price one company would need to pay to acquire another company. While there are other factors that might play into a final acquisition price, enterprise value gives a more comprehensive alternative to determine a company's worth than market capitalization alone.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Investors use EBITDA as a useful way to measure a company's overall financial performance and profitability. EBITDA is a straightforward metric that investors can calculate using numbers found on a company's balance sheet and income statement. EBITDA helps investors compare a company against industry averages and against other companies.
Calculating EBITDA
To calculate EBITDA for a company, you'll need to first find the earnings, tax, and interest figures on the company's income statement. You can find the depreciation and amortization amounts in the company's cash flow statement. However, a useful shortcut to calculate EBITDA is to begin with the company's operating profit, also known as earnings before interest and taxes (EBIT). From there you can add back depreciation and amortization.
The EV/EBITDA ratio is a popular metric used as a valuation tool to compare the value of a company, debt included, to the company’s cash earnings less non-cash expenses. It'sideal for analysts andinvestors looking to compare companies within the same industry.
Theenterprise-value-to-EBITDA ratiois calculated by dividing EV byEBITDAorearnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy. However, thecomparison of relative values among companies withinthe same industry is the bestway for investors to determine companies with the healthiest EV/EBITDA within a specific sector.
Benefits of EV/EBITDA Analysis
Just like the P/E ratio (price-to-earnings), the lower theEV/EBITDA, the cheaper the valuation for a company. Althoughthe P/Eratio is typicallyused as the go-to-valuation tool, there are benefits to using the P/E ratioalong with the EV/EBITDA. For example, many investors look for companiesthat have bothlow valuations usingP/E andEV/EBITDA and solid dividend growth.
What Does It Mean a High EV/EBITDA?
A high EV/EBITDA means that there is a potential the company is overvalued. It is important to remember that when using the ratio, you can only really apply it comparatively in a specific sector. Utilities will run at different ratios than consumer discretionary, for example.
What Does Negative EV/EBITDA Mean?
This metric can become confusing when it turns negative and is generally not a widely-used metric. For one, it doesn't give an accurate picture of a company's financial health if they are a startup. Secondly, a company could have sold a portion of their company and is sitting on a load of cash, skewing the ratio.
Why Use EV/EBITDA?
The ratio is most commonly used to compare companies in the same industry. It is a metric used as a valuation tool comparing a company's value to the company's earnings less non-cash expenses.
Enterprise value (EV) is a measure of a company's total value. It can be thought of as an estimate of the cost to purchase a company. EV accounts for a company's outstanding debts and liquid assets. EV is often used as a more comprehensive alternative to equity market capitalization.
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-to-EBITDA ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy.
The average EV/EBITDA of these companies is 14. Companies 1 & 2 traded at above-average EV/EBITDA, which may be due to high growth, better ROE and ROCE. ROE is the return on equity capital and can be calculated by dividing the net profit by the company's equity capital.
An EV/EBITDA multiple of about 8x can be considered a very broad average for public companies in some industries, while in others, it could be higher or lower than that. For private companies, it will almost always be lower, often closer to around 4x.
Generally speaking, a good EBITDA margin for manufacturing businesses falls between 5% and 10%. However, this will vary depending on the specific industry you are manufacturing your products for, and how capital-intensive your operations are.
The EV/EBIT ratio is a very useful metric for market participants. A high ratio indicates that a company's stock may be overvalued. While beneficial for an immediate sale of shares for profit-taking, such a situation can spell disaster if the market prices reverse, causing share prices to plummet.
1 EBITDA measures a firm's overall financial performance, while EV determines the firm's total value. As of Dec. 2023, the average EV/EBITDA for the S&P 500 was 15.28. 1 As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.
Apple's EBITDA for the trailing twelve months (TTM) ended in Mar. 2024 was $131,393 Mil. Therefore, Apple's EV-to-EBITDA for today is 23.26. During the past 13 years, the highest EV-to-EBITDA of Apple was 28.37.
Coca-Cola's ev / ebitda for fiscal years ending December 2019 to 2023 averaged 20.6x. Coca-Cola's operated at median ev / ebitda of 21.1x from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Coca-Cola's ev / ebitda peaked in December 2020 at 21.9x.
A lower EV/EBITDA ratio suggests a company may be more attractive as a potential investment. A low EV/EBITDA ratio indicates that the company's enterprise value (EV) is relatively low compared to its EBITDA. This suggests that the market potentially undervalues the company.
As of 2024-06-19, the EV/EBITDA ratio of Tesla Inc (TSLA) is 46.3. EV/EBITDA ratio is calculated by dividing the enterprise value by the TTM EBITDA. Tesla's latest enterprise value is 583,111 mil USD. Tesla's TTM EBITDA according to its financial statements is 12,593 mil USD.
A good EBITDA margin is relative because it depends on the company's industry, but generally an EBITDA margin of 10% or more is considered good. Naturally, a higher margin implies lower operating expenses relative to total revenue, while a low or below-average margin indicates problems with cash flow and profitability.
The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues.
For example, if a company's annual interest expense is $1 million, then a strong EBITDA would be at least $2 million. In some industries, a higher EBITDA margin above 15% or more, may be considered favorable. A good EBITDA varies by industry, company size, industry norms, growth stage, and capital structure.
For most businesses with EBITDA of $1,000,000 - $10,000,000, the EBITDA multiple will be in the general range of 4.0x to 6.5x, increasing as EBITDA increases.
EV/EBITDA takes into account operating expenses, while EV/R looks at just the top line. The advantage that EV/R has is that it can be used for companies that are yet to generate income or profits, such as the case with Amazon (AMZN) in its early days.
Generally, EV/Sales ratios range between 1 and 3. Anything at or below 1 will be considered a low ratio. Anything at or above a 3 would be regarded as quite high.
Investors often interpret a lower ratio as an opportunity to acquire the company's shares at a relatively favorable price, potentially offering the potential for future growth. Conversely, a high EV/EBITDA ratio implies that the market values the company at a higher multiple of its earnings.
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