How to Evaluate Enterprise Value to EBITDA

by Bryan Keythman, studioD

Enterprise value-to-EBITDA (EV/EBITDA) is a valuation metric that compares a company's overall value to its earning power. A company's enterprise value is its value as a whole, including the market value of its stock and the value of its debt. The amount of earnings before interest, taxes, depreciation and amortization (EBITDA) is an estimate of a company's cash flow from its core business operations. You can use EV/EBITDA, or EV multiple, to compare the value of a company's operations with the value of other companies.

Visit any financial website that provides stock information and find a company's market capitalization in its stock quote section. For example, assume a company's market capitalization is $200 million.

Find the company's balance sheet and income statement in its 10-K annual report, which you can obtain from the "investor relations" section of its website or from the U.S. Securities and Exchange Commission's EDGAR database.

Find the amount of the company's total liabilities and the amount of cash on its balance sheet. In this example, assume the company has $50 million in total liabilities and $30 million in cash.

Add the company's market capitalization and total liabilities. Then subtract its cash from your result to calculate its enterprise value. In this example, add $50 million and $200 million to get $250 million. Then subtract $30 million from $250 million to get an enterprise value of $220 million.

Find the amount of the company's net income, interest expense, income tax expense, depreciation expense and amortization expense on its income statement. In this example, assume the company has $20 million in net income, $9 million in interest expense, $10 million in income tax expense and $5 million in depreciation and amortization expenses.

Add interest, income tax, depreciation and amortization expenses to net income to calculate EBITDA. In this example, add these amounts to get $44 million in EBITDA.

Divide the company's enterprise value by its EBITDA to calculate EV/EBITDA. Continuing the example, divide $220 million by $44 million to get an EV/EBITDA of 5. This means the company's enterprise value is five times its EBITDA.

Compare the company's EV/EBITDA with those of its competitors and the industry average. A company with a lower EV multiple than its peers may be undervalued. A higher EV multiple suggests the company may be overvalued. In this example, if the company's competitors have EV multiples of 7, 8 and 10, the subject company may be undervalued compared to its peers.

Compare the company's EV multiple over time. A growing EV multiple means the company's value is increasing, while a diminishing EV multiple means its value is decreasing. In this example, if the company's EV/EBITDA increases from 6 to 7.5, its value is increasing.

About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.