EBITDA/EV Multiple: Definition, Example, and Role in Earnings

What Is EBITDA/EV Multiple?

The EBITDA/EV multiple is a financial valuation ratio used to measure a company's return on investment (ROI). The EBITDA/EV ratio may be preferred over other measures of return because it is normalized for differences between companies. Using EBITDA normalizes differences in capital structure, taxation, and fixed asset accounting. The enterprise value (EV) also normalizes differences in a company's capital structure.

EBITDA/EV shouldn't be confused with EV/EBITDA, a more commonly employed ratio used to determine whether a company is under or overvalued compared to its peers.

Understanding EBITDA/EV Multiple

The EBITDA/EV multiple is a modification of the ratio of operating and non-operating profits compared to the market value of a company's equity plus its debt. It is calculated by dividing a company’s EBITDA, or earnings before interest, taxes, depreciation, and amortization, by its enterprise value.

The multiple essentially compares a company’s operating profitability, measured by EBITDA, to its overall enterprise value. Since EBITDA is often considered a proxy for cash income, the metric is used as a measure of a company's cash return on investment.

The EBITDA/EV uses the cash flows of a business to evaluate the value of a company. Generally, a business with a healthy cash flow will have a high value.

While computing the EBITDA/EV ratio is more complicated than other return measures, it is sometimes preferred because it provides a normalized ratio for comparing the operations of different companies.

An analyst using EBITDA/EV assumes that a particular ratio is applicable and can be applied to various companies operating within the same line of business or industry. In other words, the theory is that when firms are comparable, this multiples approach can be used to determine the value of one firm based on the value of another. Thus, EBITDA/EV is commonly used to compare companies within an industry.

What Is A Good EBITDA/EV Multiple?

The EBITDA/EV multiple is used to compare similar companies operating in the same industry or sector and means little in isolation. Whether it's "good" or "bad" depends on the industry and the EBITDA/EV multiple of similar companies.

The EBITDA/EV multiple will expected to be higher in some industries than others. Generally speaking, a higher multiple is more desirable as it suggests a company’s operating profitability is higher compared to its value.

EBITDA and EV

The EBITDA/EV multiple is made up of two components: EBITDA and EV.

EBITDA

"EBITDA" stands for earnings before interest, taxes, depreciation, and amortization. It is a widely watched measure of profitability and an alternative to net income. By excluding depreciation and amortization as well as taxes and debt payment costs, EBITDA attempts to represent the cash profit generated by the company's operations.

EBITDA sometimes attracts controversy because it is not a U.S. generally accepted accounting principle (GAAP) and, therefore, has been open to different calculations and is occasionally presented in a way that flatters a company's profits. However, a lot of investors prefer it to net income because it isn't distorted by unique variables such as taxation and capital structure, which makes it easier to compare, and is a better measure of cash flow.

EV

Enterprise value (EV) is a measure of the economic value of a company. It is frequently used to determine the value of the business if it is acquired. It is considered to be a better valuation measure than market capitalization since the latter factors in only a business' equity without regard to the debt.

EV is calculated as the market capitalization plus debt, preferred stock, and minority interest, minus cash. An entity purchasing a company would have to pay the value of the equity and assume the debt, but the money would reduce the price paid.

Example of EBITDA/EV

Wal-Mart Inc.'s EBITDA for the fiscal year 2024 was $40.93 billion. Its enterprise value was $501.23 billion during this period. This works out to an EBITDA/EV multiple of 0.08166 or 8.17%.

Over a similar time frame, Target recorded EBITDA of $8.72 billion and had an enterprise value of $81.32 billion. That gave it an EBITDA/EV multiple of 0.10723 or 10.72%.

The Bottom Line

The EBITDA/EV multiple is one of many financial ratios used to assess and value companies. This particular multiple employs normalized ratios for easier comparability and explores the relationship between a company's cash profits and valuation. A good number depends on the industry. Generally, a higher multiple is more desirable as it suggests a company’s operating profitability is higher compared to its value.