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Understanding Enterprise Value to EBITDA Ratio


Enterprise Value-to-EBITDA Ratio is used to compare a company's Enterprise Value to its EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). It is useful to determine the value of a company, whether it is undervalued or overvalued. Enterprise value measures a company's total value, and EBITDA shows the company's overall profitability and performance.

The formula to derive Enterprise Value to EBITDA Ratio

Enterprise Value to EBITDA Ratio


Enterprise Value - It includes the market capitalization of the company, short-term and long-term debts, and any cash and cash equivalents. It is used to value a company. The formula to calculate Enterprise Value is (Market Capitalization + Debts - Cash and Cash Equivalents).

EBITDA - EBITDA stands for Earnings before interest, taxes, depreciation, and amortization and is found in the company's Income Statement.

Example of Enterprise Value to EBITDA: Enterprise Value of GAIL India is Rs.70931.20 Cr. And for the financial year, EBITDA was reported as Rs. 10078.54 Cr.
The value as per the formula (Enterprise Value / EBITDA) is calculated as (70931.20 / 10078.54) = 7.04.


Key Highlights
Enterprise Value-to-EBITDA Ratio is used to compare a company's Enterprise Value to its EBITDA.

A low Enterprise Value to EBITDA ratio is considered less risky because it indicates the company is undervalued. EV/EBITDA ratio below 10 is considered good.

It is convenient to compare companies within the same industry to find better stock. Enterprise value to EBITDA ratio can vary depending on the industry.


While looking at the Enterprise Value to EBITDA Ratio, the following points should also take into consideration:
The low Enterprise Value to EBITDA ratio is considered as good. It indicates that the company is undervalued. A high ratio is considered as the company is overvalued.

This metric shows the fair market value of the company. And this metric helps investors to find out the attractive takeover candidate.

While analyzing the company's EV/EBITDA, it will be better to consider the P/E ratio. It will give a better understanding of the company, whether it is fair value or not. Many investors look at both ratios to analyze whether the company is undervalued or overvalued.

Enterprise Value to EBITDA is not useful for companies with negative cash flow or negative net profits. And, also is less useful for leveraged companies.

Many investors used this metric because it is helpful for transactional comparison as it ignores the distorting effects of the individual countries' taxation policies.


How to use Enterprise Value to EBITDA Ratio effectively:
Investors should look for a low ratio. A low Enterprise Value to EBITDA ratio is considered less risky because it indicates the company is undervalued.

Enterprise Value to EBITDA ratio is also used to measure the company's Return on Investment (ROI), as well as it is fairly valued or not.

It is convenient to compare companies within the same industry to find better stock. Enterprise value to EBITDA ratio can vary depending on the industry.

For better analysis of the company, also check other financial metrics along with Enterprise Value to EBITDA like PE ratio, PB ratio, Price to Sales Ratio, Debt to EBITDA Ratio, EBITDA Margin, etc.,


Range Indicator of Enterprise Value to EBITDA Ratio

Range Indicator Comments Screener at TSR
0 to 5 Strong Bullish Extremely Undervalued Yes
5 to 8 Bullish Highly Undervalued Yes
8 to 10 Mild Bullish Undervalued Yes
10 to 15 Neutral Rightly Valued Yes
15 to 20 Mild Bearish Overvalued Yes
20 to 25 Bearish Highly Overvalued Yes
Above 25 Strong Bearish Extremely Overvalued Yes


Related Enterprise Value to EBITDA Screener
Valuation Screener Enterprise Value to EBITDA 0 To 1 Enterprise Value to EBITDA 5 To 10 Enterprise Value to EBITDA 10 To 15


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