What is EV/EBITDA?
Enterprise Value divided by EBITDA, measuring how many years of operating earnings it would take to pay for an acquisition.
Think of it like this
Like buying a business for 10x its annual cash flow - it would take 10 years to 'earn back' your investment.
Formula
EV/EBITDA = Enterprise Value รท EBITDA- Enterprise Value: Market Cap + Debt - Cash
- EBITDA: Earnings Before Interest, Taxes, Depreciation, Amortization
Why it matters
- Accounts for debt - more accurate than P/E
- Good for comparing companies across industries
- Popular in M&A (mergers and acquisitions)
- Shows true acquisition cost
- Useful for capital-intensive businesses
What's a good value?
< 8
Undervalued
Potentially cheap acquisition
8-12
Fair Value
Reasonable valuation
12-15
Premium
Paying extra for quality or growth
> 15
Expensive
Very high expectations or overvalued
Real-world example
A company with $100M EV and $10M EBITDA has EV/EBITDA of 10x - acquirer would 'earn back' their investment in 10 years of operating profit.
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