EV/EBITDA and It’s analysis

Introduction:-

Just like the PEratio (price to earning), the EV/EBITDA is very famous for the valuation of the company. EV stands for enterprise value and EBITDA stand for Earnings before interest, tax, depreciation and amortization (EBITDA). And it compares company on very different stages on the basis of the company’s earning. If it is rightly calculated then it reveals the secret that what is the current position of the company? Is company’s share is undervalued or overvalued?

Although the PE ratio typically used as the go-to-valuation tool, there are benefits of using the PEratio along with the EV/EBITDA. By using both ratios you get more accurate results about company’s current status.

Many investors look for companies that have low valuation by using PE and EV/EBITDA and solid dividend growth.

How to calculate?

The enterprise value to EBITDA ratio is calculated by:-

Ratio = EV/EBITDA

Where EV is the company’s enterprise value (EV) and calculated as follows-

EV = market capitalization + preferred shares + minority interest + debt – total cash

This metrics is used as a valuation tool to compare the value of a company. It’s ideal for analyst and investors to look and compare within the same industry for better understanding of this ratio.

Best if EV/EBITDA <10

Average if EV/EBITDA is between 10 to 14.

How to use EV/EBITDA or using tips:-

Typically EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investor to determine companies with the healthiest EV/EBITDA within the specific sector.

Limits of EV/EBITDA:-

Never invest on sole basis of that ratio. Use it with other ratios like PE ratio, debt to equity and book to value etc.

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