How to Evaluate Enterprise Value to EBITDA

by Bryan Keythman

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.

Step 1

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.

Step 2

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.

Step 3

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.

Step 4

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.

Step 5

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.

Step 6

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.

Step 7

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.

Step 8

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.

Step 9

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.