Work out EV multiples, explain what they mean and assess how useful EV/EBITDA is
The idea
Enterprise value is the market value of the whole business: equity plus debt, preferred shares and non-controlling interests, less cash and short-term investments. EV/EBITDA pairs it with a flow available to all capital providers, so it suits comparisons of companies with different leverage. EBITDA is usually positive even when net income is not, and is less affected by differing depreciation policies. Its weaknesses are that EBITDA ignores capital spending, which matters most for capital-intensive firms, and working capital needs, and it can flatter companies with heavy debt service. Other enterprise value multiples include EV to sales. The traps are forgetting to deduct cash when computing enterprise value and comparing enterprise value with an equity-level measure such as net income.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Market-Based Valuation: Price and Enterprise Value Multiples
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