What is the EBITDA/EV multiple?
The EBITDA/EV multiple is a valuation ratio that measures how much cash operating profit (EBITDA) a company generates per dollar of enterprise value (EV). It’s effectively the inverse of the more commonly used EV/EBITDA ratio. Because it relates cash-like earnings to enterprise value (equity value plus net debt), it can be used to compare return-on-investment across firms with different capital structures.
Key takeaways
– Definition: EBITDA/EV = EBITDA ÷ Enterprise Value (EV). Often expressed as a decimal or a percentage.
– Interpretation: A higher EBITDA/EV implies more EBITDA per unit of enterprise value (i.e., potentially better operating return on the total value of the business).
– Use: Best used to compare similar companies in the same industry or to track a firm’s trend over time.
– Caveats: EBITDA ignores interest, taxes, capex and working capital — it’s not a cash-flow substitute. EV and EBITDA must be calculated consistently across companies.
Why EBITDA/EV matters (Understanding the concept)
– Normalizes for capital structure: EBITDA excludes interest, while EV includes debt, so the ratio mitigates differences in financing between firms.
– Focuses on operating cash profitability: EBITDA is often used as a proxy for operating cash earnings (with limitations).
– Comparable across peers: Because it strips out tax and financing effects, it’s useful for cross-company comparisons within industries.
What does EBITDA and EV stand for?
– EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. It is intended to approximate operating cash earnings by removing non-cash charges (depreciation and amortization) and financing/tax effects.
– Enterprise Value (EV): Market capitalization + total debt + preferred stock + minority interest − cash and cash equivalents. EV represents the total value an acquirer would pay to buy the entire business and assume its debt.
How to calculate EBITDA/EV (formula and steps)
Formula:
– EBITDA/EV = EBITDA ÷ Enterprise Value
Step-by-step practical procedure
1. Choose period and basis:
– Decide whether to use trailing twelve months (TTM) EBITDA, last fiscal year, or forward (consensus) EBITDA. Be consistent across comparables.
2. Obtain EBITDA:
– From company filings (income statement + addbacks) or from financial data providers (e.g., Yahoo Finance, company investor relations).
– Adjust for non-recurring items or differences in accounting where appropriate (see adjustments below).
3. Compute EV:
– Market capitalization = share price × shares outstanding.
– Add: total debt (short-term + long-term), preferred stock, minority interest.
– Subtract: cash and cash equivalents.
– Note: For leased assets or under IFRS 16, consider capitalizing leases for comparability.
4. Divide:
– EBITDA/EV = EBITDA ÷ EV. Multiply by 100 to express as a percentage.
5. Compare and interpret:
– Benchmark against industry peers and historical company multiples. Higher is typically better, but comparisons must be apples-to-apples.
Example calculations (practical)
– Walmart (fiscal 2024)
– EBITDA: $40.93 billion
– EV: $501.23 billion
– EBITDA/EV = 40.93 / 501.23 = 0.08166 → 8.17% (source: Yahoo Finance via Investopedia example)
– Target (similar period)
– EBITDA: $8.72 billion
– EV: $81.32 billion
– EBITDA/EV = 8.72 / 81.32 = 0.10723 → 10.72% (source: Yahoo Finance via Investopedia example)
EV/EBITDA vs EBITDA/EV — relationship
– They are reciprocals: EV/EBITDA = 1 ÷ (EBITDA/EV). If EBITDA/EV = 0.10 (10%), EV/EBITDA = 10.
– EV/EBITDA is more commonly cited in valuation (e.g., “company trades at 8x EV/EBITDA”); EBITDA/EV can be convenient when you want to express EBITDA yield as a percentage (like an ROI).
What is a “good” EBITDA/EV multiple?
– There is no universal “good” number. Multiples vary substantially by industry, growth prospects, stability, and capital intensity.
– In general:
– Higher EBITDA/EV is more desirable (more operating earnings per dollar of enterprise value).
– Compare to industry peers, sector medians, and historical ranges.
– Consider growth-adjusted and risk-adjusted context — a high multiple in a low-growth industry may reflect lower perceived risk.
– Use other metrics (free cash flow yield, P/E, EV/EBITDA, ROIC) to confirm conclusions.
Limitations and adjustments — practical tips
– EBITDA is not GAAP for all adjustments: companies sometimes report adjusted EBITDA differently. Review footnotes and reconcile to company filings.
– Ignores capital expenditures and working capital: in capital-intensive businesses, EBITDA may overstate true cash generation.
– Taxes and interest do matter: EBITDA excludes them, so leverage and tax structure can materially affect shareholder returns.
– Lease accounting: under IFRS 16 and similar GAAP changes, leases might change reported EBITDA/EV comparability. Consider capitalizing operating leases where needed.
– Non-recurring items: remove or normalize one-time gains/losses.
– Minority interest and preferred stock: be consistent in EV calculation.
How analysts use EBITDA/EV (practical applications)
– Peer benchmarking: screen within industry for higher EBITDA yield candidates.
– Valuation cross-check: convert to EV/EBITDA or use as an earnings-yield style measure (compare to bond yields or cost of capital).
– Acquisition screening: buyers sometimes use EBITDA/EV to see how much EBITDA they would “buy” per dollar of enterprise value.
– Trend analysis: track company’s EBITDA/EV over time to see if operating profitability relative to valuation is improving or deteriorating.
Worked practical step-by-step example you can reproduce (Excel or calculator)
1. Gather data:
– Share price: $X; shares outstanding: Y → market cap = X*Y
– Total debt (short + long term): D
– Cash and equivalents: C
– Preferred stock, minority interest: P, M
– EBITDA (TTM or forward): E
2. Compute EV = market cap + D + P + M − C
3. Compute EBITDA/EV = E / EV
4. Display as decimal and percentage (e.g., 0.09 → 9.0%).
5. Repeat for peers and plot to compare.
Coca‑Cola example (data point)
– As reported by Investopedia (citing Yahoo Finance), Coca‑Cola’s EBITDA/EV multiple was 4.81% as of August 21, 2024. Always re-check current market data, since multiples move with share price, debt levels, and updated EBITDA figures (source: Yahoo Finance via Investopedia).
Data sources and where to get inputs
– Company 10‑K/10‑Q: EBITDA (reconcile from operating income), debt, cash.
– Market data providers: Yahoo Finance, Google Finance, Bloomberg, S&P Capital IQ for market cap and enterprise value components.
– Analyst consensus: for forward EBITDA, use Consensus Estimates from Bloomberg, Refinitiv, or broker reports.
Bottom line
EBITDA/EV is a useful normalized measure of how much operating earnings a business generates per dollar of enterprise value. It’s most valuable when used consistently across comparable companies, adjusted for accounting differences and non-recurring items, and considered alongside other valuation and cash-flow metrics. There’s no one “good” number—use industry benchmarks and historical context to draw conclusions.
Sources
– Investopedia: “EBITDA/EV Multiple” (source URL provided by user: https://www.investopedia.com/terms/e/ebitda-ev-multiple.asp)
– Yahoo Finance company key statistics pages cited in examples (Walmart, Target, Coca‑Cola) as referenced in the Investopedia article
If you’d like, I can:
– Walk through a live calculation for a specific company using current market data.
– Provide an Excel template that computes EBITDA/EV with common adjustments.