What is EV/EBITDA and why does it matter?

The EV/EBITDA ratio, or enterprise value to earnings before interest, taxes, depreciation and amortization ratio, can be used to determine the potential profitability of an investment in the stock market. It’s calculated by dividing the total market value of a company’s equity by its EBITDA – earnings before interest, taxes, depreciation and amortization expenses. When you compare two companies with different assets and liabilities but similar revenues, you can use this tool to determine which one will make more money in the future. Let’s look at an example to demonstrate how it works.

Enterprise Value definition

Enterprise value is a measure of a company’s value, including both equity value and debt. Equity value is the market capitalization of a company, or the price that shareholders would receive if they sold all of their shares. Debt includes both bonds and loans that a company has taken out. Enterprise value also includes any preferred shares or minority interests that a company may have.

EBITDA Definition

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. In short, it’s a measure of a company’s profitability that strips out the impact of certain expenses.
Read more about EBITDA Definition here.

How are they related?

EV/EBITDA is a popular valuation metric used by investors to measure a company’s value. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The EV in EV/EBITDA stands for enterprise value. Enterprise value is the sum of a company’s equity value and its debt.

Example

Check Apple’s EBITDA here.