Key takeaways
– The enterprise multiple (EV/EBITDA) measures a company’s enterprise value relative to its EBITDA and is widely used by acquirers and investors to compare valuation across firms and industries.
– EV includes market capitalization plus debt less cash, so the ratio reflects both equity and debt claims — important for takeover analysis.
– Interpretation depends on industry and growth prospects: a “low” EV/EBITDA can signal undervaluation or a value trap; a “high” multiple can reflect growth expectations or overpayment risk.
– Use trailing (TTM) and forward (projected) EBITDA, adjust for one‑offs, and always compare to industry peers and historical ranges.
– Be mindful of limitations: EBITDA is a non‑GAAP measure that ignores capex, working capital, and differences in accounting and capital structure.
What the enterprise multiple is (simple definition)
Enterprise multiple = EV / EBITDA
Where:
– EV (Enterprise Value) = Market capitalization + Total debt − Cash and cash equivalents (often also adjusted for minority interest, preferred stock, pension liabilities and capitalized leases)
– EBITDA = Earnings before interest, taxes, depreciation and amortization (TTM or forward/pro forma)
Why it’s useful
– Compares companies with different capital structures because EV adds debt and subtracts cash.
– Better for M&A and buyout screening than price/earnings (P/E) because an acquirer assumes debt and receives cash.
– More comparable across countries because it excludes interest and taxes, reducing distortions from different tax regimes.
Step‑by‑step: How to calculate enterprise multiple (practical)
1. Choose the EBITDA basis
– Trailing‑12‑months (TTM) EBITDA for current operating performance, or
– Forward (consensus or management) EBITDA for expected performance.
2. Get market capitalization
– Market cap = share price × shares outstanding (source: exchange quotes, company filings, financial data vendors).
3. Determine total debt
– Sum short‑ and long‑term debt from the balance sheet (include current maturities).
– Consider off‑balance items if material (capitalized leases under IFRS 16 / ASC 842, pension deficits).
4. Determine cash and cash equivalents
– Use cash line from the balance sheet (can net restricted cash differently if needed).
5. Compute EV
– EV = Market cap + Total debt − Cash and cash equivalents ± other adjustments (preferred stock, minority interest).
6. Compute enterprise multiple
– EV/EBITDA = EV divided by EBITDA.
7. Compare and interpret
– Compare to industry median, direct peers, and the company’s historical multiple.
– Look at TTM vs forward multiples to see if expected profitability reduces the valuation.
Dollar General — worked example
Using published figures for the trailing 12 months ended Jan. 28, 2022:
– Market capitalization (as of Apr. 4, 2022): $56.2 billion
– Total debt: $14.25 billion
– Cash and cash equivalents: $344.8 million (~$0.345 billion)
– TTM EBITDA: $3.86 billion
Calculation:
– EV = 56.2 + 14.25 − 0.345 = 70.105 billion
– EV/EBITDA = 70.105 / 3.86 ≈ 18.2
Interpretation for this example:
– The multiple rose from ~17.4 the prior year to ~18.2 largely because cash decreased by about $1 billion and EBITDA declined by about $300 million — showing how both cash and earnings changes affect EV/EBITDA.
How investors and acquirers commonly use EV/EBITDA
– Screening: find companies trading below industry median multiples (potential buys).
– Deal valuation: acquirers use EV/EBITDA to benchmark takeover prices.
– Relative valuation: compare direct competitors or industry subsegments to see market pricing for similar earnings streams.
– Paired with growth: combine EV/EBITDA with growth metrics (e.g., EV/EBITDA-to-growth) to adjust for expected expansion.
Practical steps and checklist before making a decision
1. Use both TTM and forward EBITDA to see current vs expected valuation.
2. Normalize EBITDA:
– Remove one‑time gains/losses, restructuring items, and nonrecurring additives.
3. Adjust EV when appropriate:
– Add minority interest, preferred stock, pension obligations, and lease liabilities if material; include excess cash separately.
4. Compare apples to apples:
– Compare to direct competitors or the industry median, not the market as a whole.
5. Consider leverage and liquidity:
– A high EV/EBITDA with high leverage increases bankruptcy risk; analyze debt maturities and coverage ratios.
6. Check capital intensity:
– EBITDA ignores capex — for capital‑intensive firms (utilities, telecom, rail), prefer EV/EBIT or metrics that incorporate capex and free cash flow.
7. Review accounting differences:
– EBITDA can be calculated differently across firms; reconcile definitions in 10‑Ks/10‑Qs.
8. Scenario analysis:
– Run sensitivity for EBITDA recovery/decline and changes in interest rates affecting refinancing risk.
9. Combine with other valuation tools:
– Use alongside P/E, EV/EBIT, discounted cash flow (DCF), and multiples on revenue or free cash flow.
Common pitfalls and limitations
– EBITDA ignores capital expenditures, working capital needs and ignores the timing of cash flows.
– It is non‑GAAP and can be manipulated through adjustments.
– Sector and life‑cycle effects: cyclical firms and growth companies can have misleading multiples.
– Value traps: a low EV/EBITDA can reflect legitimate long‑term deterioration in the business rather than a buying opportunity.
– Lease accounting and off‑balance sheet items may distort comparability unless adjusted.
When to prefer other metrics
– Use EV/EBIT for companies with heavy depreciation/amortization (capex heavy).
– Use free cash flow yield or DCF for capital‑intensive and cash‑flow focused analysis.
– Use P/E when equity perspective is primary and capital structure is stable.
Data sources and where to pull numbers
– Company filings (Form 10‑K, 10‑Q) — for debt, cash, and management definitions of EBITDA (e.g., Dollar General Form 10‑K).
– Market data providers — Yahoo Finance, Bloomberg, Refinitiv, Macrotrends for historical market caps and multiples.
– Analyst reports and consensus estimates — for forward EBITDA projections.
Quick FAQ
– Is a lower EV/EBITDA always better?
No. A low multiple can indicate undervaluation, but also business decline, cyclical weakness, or structural problems. Investigate underlying drivers.
– Should I use TTM or forward EBITDA?
Both. TTM shows current operating performance; forward captures expected performance and market expectations.
– Is there a “good” EV/EBITDA number?
No universal cutoff. Typical ranges vary widely by sector and growth profile — always benchmark to peers and historical ranges.
Summary (practical decision checklist)
1. Calculate EV and choose TTM vs forward EBITDA.
2. Normalize EBITDA and adjust EV for nonstandard items.
3. Compare to peers, sector medians, and historical multiples.
4. Factor in growth expectations, capital intensity, leverage and liquidity.
5. Use additional valuation tools (EV/EBIT, free cash flow, DCF) before making a buy/sell decision.
References
– Investopedia — “Enterprise Multiple (EV/EBITDA)” by Eliana Rodgers. https://www.investopedia.com/terms/e/ev-ebitda.asp
– Dollar General — Form 10‑K for the fiscal year ended January 28, 2022 (SEC filing).
– Macrotrends — Dollar General market capitalization historical data.
If you’d like, I can:
– Build an Excel template that calculates EV/EBITDA and compares a company to peers, or
– Run this calculation and peer comparison for any public company you pick. Which would you prefer?