The enterprise-value-to-EBITDA formula
The enterprise-value-to-EBITDA multiple is the enterprise value divided by EBITDA: EV/EBITDA = enterprise value ÷ EBITDA. The enterprise value is what a buyer would pay for the whole business. The EBITDA is earnings before interest, taxes, depreciation and amortisation — a rough proxy for the cash profit the business generates from its day-to-day work. 10.00 means ten dollars of price for each dollar of yearly operating profit. Try the numbers on the enterprise-value-to-EBITDA calculator and it does the division for you.
Step 1: find the enterprise value
Start with the market. The enterprise value is the market capitalisation plus the total debt, minus the cash and equivalents. The market capitalisation is the share price times the shares outstanding — find it on any stock quote page. The total debt and the cash sit on the balance sheet. Here is the worked example: market capitalisation of $1,000,000, plus total debt of $600,000, minus cash of $100,000, gives an enterprise value of $1,500,000. The debt is included because the buyer takes it on; the cash is subtracted because the buyer gets it back.
Step 2: find the EBITDA
Start with the company’s accounts. EBITDA is earnings before interest, taxes, depreciation and amortisation. Take the operating profit and add back the depreciation and amortisation, or take the net income and add back the interest, the taxes, the depreciation and the amortisation. Find the operating profit on the income statement and the depreciation and amortisation on the cash flow statement. Here is the worked example: EBITDA of $150,000.
Step 3: divide and read the answer
Divide the enterprise value by the EBITDA. Here is the worked example: $1,500,000 ÷ $150,000 = 10.00. So the buyer pays $10 for each $1 of yearly operating profit. The answer is a plain number — write it as 10.00. A higher number means you pay more for each dollar of operating profit; a lower number means you pay less.
Three worked examples
Example one — the headline numbers. A business has an enterprise value of $1,500,000, and it throws off $150,000 of EBITDA a year. The EV/EBITDA is $1,500,000 ÷ $150,000 = 10.00. The buyer pays $10 for each $1 of yearly operating profit.
Example two — how big an enterprise value for a 12.00 multiple? The same business throws off $150,000 of EBITDA, and you want a 12.00 EV/EBITDA. The enterprise value needed is 12.00 × $150,000 = $1,800,000. The enterprise-value-to-EBITDA calculator runs the reverses for you.
Example three — how much EBITDA for a 12.00 multiple? The same business has an enterprise value of $1,500,000, and you want a 12.00 EV/EBITDA. The EBITDA needed is $1,500,000 ÷ 12.00 = $125,000. Less EBITDA than that, and the EV/EBITDA rises above 12.00.
One reverse to check your answer
Work the numbers backwards. A business throws off $150,000 of EBITDA, and you want its EV/EBITDA to reach 12.00. The smallest whole-dollar enterprise value for the EV/EBITDA to reach the target is $1,800,000. A dollar less, and the value falls short of the $1,800,000 needed. The enterprise-value-to-EBITDA calculator runs the reverses for you.
Enterprise value vs EBITDA
The enterprise value is what the buyer pays for the whole business — the market capitalisation plus the total debt, minus the cash and equivalents — while the EBITDA is what the business throws off in a year — the earnings before interest, taxes, depreciation and amortisation. Here is the worked example: an enterprise value of $1,500,000 and EBITDA of $150,000 give an EV/EBITDA of 10.00. Find the enterprise value on the balance sheet and the market, and the EBITDA in the income statement. The enterprise value is a price, the EBITDA is a flow — and the multiple is the price per dollar of flow.
What a 10.00 multiple means
A 10.00 multiple means the buyer pays $10 for each $1 of yearly operating profit — the market expects the operating profit to keep coming. Here is the worked example: a $1,500,000 enterprise value on $150,000 of EBITDA is a 10.00 EV/EBITDA. A 10.00 multiple is neither good nor bad on its own — the industry decides what that price means. Compare it with the same industry, not with the market as a whole. An EV/EBITDA in single digits can mean the market values the business cheaply against its operating profit — or that the operating profit is about to fall. An EV/EBITDA in the mid-teens can mean the market expects the operating profit to grow — or that the business is expensive for the profit it throws off.
What a 12.00 target means
A 12.00 target means the buyer pays $12 for each $1 of yearly operating profit. Here is the worked example: the enterprise value needed for a 12.00 EV/EBITDA is $1,800,000 on $150,000 of EBITDA, and the EBITDA needed for a 12.00 EV/EBITDA is $125,000 on a $1,500,000 enterprise value. A 12.00 target is a higher price than a 10.00 multiple — the buyer pays more for each dollar of operating profit. Whether that price is fair depends on the growth the market expects — a business whose operating profit will grow can justify a higher multiple than one whose profit will stand still.
Why EBITDA is not cash flow
EBITDA is not cash flow: it ignores the capital expenditure the business needs to keep running, so an EV/EBITDA built on a capital-hungry business flatters it — a business that must spend heavily on equipment can look cheap on EV/EBITDA while its free cash flow is thin. It also ignores interest and tax, so a business loaded with debt can show strong EBITDA while its lenders take most of it. Use the EV/EBITDA next to the free cash flow, and say which profit you used. Never mix them: an EV/EBITDA on operating profit against one on free cash flow is two different measures.
The EV/EBITDA vs the P/E
The price-to-earnings ratio is the share price divided by earnings per share — price per dollar of earnings — while the EV/EBITDA is the enterprise value divided by EBITDA — the whole-company price per dollar of operating profit. The P/E tells you what the market charges for the earnings; the EV/EBITDA tells you what the market charges for the operating profit. Debt, buybacks and dividends all sit outside EBITDA, so the EV/EBITDA already counts the debt in the enterprise value — which is why buyers prefer it to the P/E when comparing companies with different debt loads. Read the guide to the price-to-earnings ratio and try the price-to-earnings ratio calculator and the PEG ratio calculator for the growth side.