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EV/EBITDA Multiple: What is the EV EBITDA Ratio, Why Is it important?

EV/EBITDA Multiple: What is the EV EBITDA Ratio, Why Is it important?

. 4 min read

In this article

What is the EV to EBITDA multiple? How to calculate the EV/EBITDA ratio with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about it. Furthermore, you will have access to an excel template that lets you calculate EV/EBITDA for more than 65,000 companies with just one click.

What is the EV to EBTIDA multiple?

EV/EBITDA is the ratio between the enterprise value and the EBITDA of a company. The valuation metric compares the debt-included value of a company to its cash earnings. Investors and analysts typically use it to compare business within the same industry. EV/EBITDA functions in a similar fashion to P/E, but it is more useful when comparing business with varying degrees of financial leverage and valuing capital-intensive companies with abnormal levels of depreciation and amortization.

How to calculate the EV/EBITDA multiple with the right formula

The EV/EBITDA ratio is calculated quite simply: just divide the enterprise value of a company by its EBITDA.

Enterprise Value: Enterprise Value (EV), also referred to as Business Enterprise Value (BEV), reflects the market value of the entire business. In laymen’s terms, it’s the amount an acquirer would have to pay to buy a business. In valuation terms, enterprise value represents the market value of the company’s total operating assets.

= Market Capitalization

(+) Total Debt
(+) Minority Interest and Other Liabilities
(+) Preferred Equity

(-) Cash and Short Term Investments
(-) Long Term Investments

(-) Other Adjustments

EBITDA: EBITDA is defined as Earnings before Interest, Taxes, Depreciation and Amortization excluding unusual items. It is a commonly used metric in valuation as a proxy for operating profitability. EBITDA gives us a clearer picture of profitability when comparing companies with different capital structures. You can find a detailed EBITDA explanation at this article.

= Earnings Before Taxes

(+) Net Interest Expense
(+) Non Operating Expenses

(+) D&A
(+) Unusual Expenses

Why is the EV/EBITDA ratio important?

You'll be surprised to learn that, according to James O'Shaughnessy's research, stocks with a low EV to EBITDA widely outperform the market.

In his studies, he considers the entire U.S. stock market and divides the stocks into 10 deciles according to EV to EBITDA ratio. Stocks in the highest decile (those with the highest EV to EBITDA) drastically underperform the market, while those in the lowest decile (those with the lowest EV to EBITDA multiple) widely outperformed it.

In the 45-year backtest period between 1964 and 2009, stocks in the highest decile (those with the highest EV to EBITDA) generated a 5% CAGR compared to the 11.22% CAGR of the overall market. At the same time, stocks in the lowest decile (those with the lowest EV to EBITDA) generated a 16.58% CAGR.

If you don't want to underperform the market, you should definitely check in which decile your stocks are. You can do that with the Finbox data explorer. Just follow these simple steps:

  1. Sign Up for free at Finbox

  2. Go to the Finbox data explorer

  3. Select the company and the metric you want to check (In this case we want to check the EV to EBITDA)
    EV EBITDA multiple Finbox Data Explorer

  4. Scroll down to Sector Benchmark Analysis
    EV EBITDA ratio sector benchmark analysis

  5. Control in what decile are your stocks (If your company is in the lowest decile, you will likely underperform the market.)

EV to EBITDA: Benchmarks by Sector

As of May 14, 2020, the sectors with the highest EV/EBITDA multiples are real estate, utilities, and consumer staples. Financials, energy, and materials are the sectors with the lowest EV/EBITDA multiples.

EV EBITDA multiple by sector

You can get up to date stats and graphs like that directly in Excel with the Finbox Excel Add-in.

EV to EBITDA Example [+ Excel Template]

EV/EBITDA Template
I’ve created an example calculation of EV/EBITDA to try out. To explore the EV/EBITDA ratios of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click here to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.

Don't underperform the market!

Finbox makes it easy to find companies with a low EV / EBITDA multiple. View the top 100 stocks with the lowest EV/EBITDA multiples here.