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Enterprise value multiple definition

Description

Enterprise value multiple (EV multiple) is used along with the enterprise value. It compares a theoretical company’s takeover price with company’s EBITDA value. In other words, the money that is going to be spent on acquiring the company is compared to the company’s earnings, calculated by the method of EBITDA. Data needed to calculate this ratio is collected from the balance sheet, income statement and stock market bulletin.

This ratio is important for evaluating the time that is needed for the company to earn the amount of money (on EBITDA basis) that would equal the enterprise value. So the enterprise value multiple is important for the investors while making a decision whether to acquire the company or not. Relying only on EV multiple alone is not recommended. Further analysis is needed.

Norms and limitations

In general there are no norms for this ratio.

It is recommended to compare this ratio to those of the companies, working within the same industry.

Formula

Enterprise value is calculated by adding market capitalization to total debts and extracting cash and cash equivalents.

EBITDA is calculated by adding the net income to the interest expense, plus taxes, plus depreciation and amortization.