EBITDA Multiple

The EBITDA multiple measures the value of a company in terms of total equity and debt while excluding cash and investments in other companies.

What is the EBITDA Multiple?

The EBITDA multiple, or enterprise value multiple, is a financial ratio used to determine the value of a company and measure the return on investment.  It provides a normalized ratio for differences in capital structure, taxation, fixed assets, and for comparing disparities of operations in various companies. It takes into account the enterprise value, which represents market capitalization, including debt and the earnings before interest, tax, depreciation, and amortization.

What is the Formula for the EBITDA Multiple?

EBITDA Multiple = Enterprise Value / EBITDA

To Determine the Enterprise Value and EBITDA:

Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents)

EBITDA = Operating income + Depreciation + Amortization

To Illustrate:

Costco Wholesale Corp has an enterprise value of $69.3B as of Dec. 31, 2016. For the full year of 2016, its EBITDA was reported at $5.036B. The resulting EBITDA multiple is 13.76.

What is Enterprise Value?

Enterprise value is the total market value of a company, including common shares equity or market capitalization, short-term and long term debts, minority interest, and preferred equity, while excluding cash or cash equivalents. In other words, enterprise value is the sum of all financial claims against the company, whether they are debt or equity, including special liabilities – unfunded pension, employee stock options, environmental provisions, and abandonment provisions. It is considered a theoretical takeover price in mergers and acquisition transactions. Cash or cash equivalent are not considered because they reduce the net cost to a potential buyer, which in effect is used to pay dividends or debts.

What is EBITDA?

EBITDA or Earnings before interest, tax, depreciation and amortization is the income derived from operations before non-cash expenses, income, taxes, and capital. It reflects the company’s financial performance in terms of profitability prior to certain uncontrollable expenses. A higher EBITDA margin indicates a company’s operating expenses are smaller than its total revenue, which leads to a profitable operation. EBITDA can also be compared to sales as EBITDA Margin.

How Important is the EBITDA Multiple?

One of the important features of the EBITDA multiple is its inclusion of debt and equity, resulting in an accurate representation of total business performance.  It is used to find attractive takeover candidates for a merger or acquisition. Usually, a business with a low EBITDA multiple can be a good candidate for acquisition.  An EV/EBITDA value of below 10 is considered to be healthy and above par by investors and analysts. Investors use a company’s enterprise multiple to determine whether a company is undervalued or overvalued. A low ratio indicates that a company might be undervalued, and a high ratio indicates that the company might be overvalued. Equity research analysts use this multiple when making investment decisions.