Financial Encyclopedia
Enterprise Value / EBITDA
Definition
EV/EBITDA is a ratio that compares the enterprise value (EV) of a company to its earnings before taxes, depreciation and interest (EBITDA).
Example
Suppose it is necessary to value O’Key. It is a public company whose main competitors in Russia are Magnit, X5 Retail Group and Lenta.
It is necessary to collect data on companies for the 2nd quarter of 2022.
EV/EBITDA (Magnit) = 4.8
EV/EBITDA (X5 Retail Group) = 4.5
EV/EBITDA (Lenta) = 3.3
Mean = (4.8 + 4.5 + 3.3) / 3 = 4.2
O'Key has an EV/EBITDA of 2.5 that is below the industry average of 4.2.
More detailed
The ratio is used to compare a company with other industry peers. The indicator is well suited for comparing companies with different financial leverage and with different levels of depreciation.
The EV/EBITDA ratio shows investors how many times EBITDA they have to pay, were they to purchase the entire business.
If the company's EV/EBITDA is below the industry average, then its shares are considered undervalued.
According to Ranks methodology, this indicator is analyzed in the Value block and used along with other indicators to calculate the score. The indicator is presented as a % of repurchased shares.
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