What is EV/EBITDA?
This is a calculation used to value a business. EV stands for enterprise value, while EBITDA is earnings before interest, taxes, depreciation and amortisation. It’s a measure of a company’s operating performance based on data from its income statement.
Where have you heard about EV/EBITDA?
EBITDA is one of the operating measures most used by analysts and investors, although generally speaking it’s most useful for large companies that have significant assets or a large amount of debt financing. It's not so worthwhile in evaluating a small company with no significant loans.
What you need to know about EV/EBITDA...
The formula for calculating EBITDA is: EBITDA = EBIT + depreciation + amortisation.
It can tell you a lot about companies which have large amounts of fixed assets that are subject to heavy depreciation changes, such as in the manufacturing industry, or where a company has recently made a large acquisition.
It allows you to focus on operating profitability as a single measure of performance, so you can easily compare similar companies across a single industry, or companies operating in different tax brackets.