Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple, which is enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), looks at a company the way a potential acquirer would by considering the company's debt. What's considered a "good" or "bad" enterprise multiple will depend on the industry.
Investors mainly use a company's enterprise multiple to determine whether a company is undervalued or overvalued. A low ratio relative to peers or historical averages indicates that a company might be undervalued and a high ratio indicates that the company might be overvalued.
Enterprise multiples can vary depending on the industry. It is reasonable to expect higher enterprise multiples in high-growth industries (e.g. biotech) and lower multiples in industries with slow growth (e.g. railways).
Formula and Calculation of Enterprise Multiple
Enterprise Multiple = EV / EBITDA
where:
EV = Enterprise Value = Market capitalization + total debt − cash and cash equivalents
EBITDA = Earnings before interest, taxes, depreciation and amortization
Source: Investopedia, Enterprise Multiple (EV/EBITDA): Definition, Formula, Examples, accessed 25 December 2023, <https://www.investopedia.com/terms/e/ev-ebitda.asp>
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