Below is an EV/EBITDA calculator, or Enterprise Value to Earnings Before Interest, Tax, Depreciation, and Amortization Calculator. Enter a company's details to compute its EV/EBITDA.
Using the EV/EBITDA Calculator
There are quite a few fields in this one, but you should be able to populate it quickly using a quarterly or annual report.
- Market capitalization: The total number of outstanding shares of the company multiplied by their value per share.
- Total debt: All short and long-term debt and liabilities listed on the balance sheet.
- Cash and Cash Equivalents: The balance statement's total cash and cash equivalents.
- Net Income: The total net income from the income statement.
- Interest Expense: Interest costs to the company during this period.
- Tax Expense: The money the company spent on taxes.
- Depreciation: Any depreciation charges in the period from the income statement.
- Amortization: Any amortization charges in the period from the income statement.
Once you have everything populated, hit the "Compute EV/EBITDA" button to get the ratio (and the Enterprise Value and EBITDA, listed separately).
What is the EV/EBITDA ratio?
EV/EBITDA, or the Enterprise Value to Earnings Before Interest, Tax, Depreciation, and Amortization ratio, is a valuation ratio comparing the total capitalization of a company to an alternative measure of earnings in EBITDA.
Enterprise Value takes the total market capitalization of a company – that is, the total implied price of a firm based on its shares – and adds to it any outstanding debt. Then, EV nets out any cash.
EBITDA adjusts a company's earnings to normalize for capitalization structure with interest and overall structure with taxes. Stopping there would leave you with EBIT, but EBITDA also backs out depreciation and amortization – non-cash write-downs of tangible and intangible assets. EBITDA does tend to get close to the actual cash flows of a firm... but more and more adjustments are fraught with issues. So beware what a company is backing out when highlighting their earnings.
Comparison with Price to Earnings
The Price to Earnings ratio is probably the most popular earnings ratio used as a shorthand for a discounted cash flow. Both EV/EBITDA and P/E can be used to compare similarly situated firms. However, in many situations, EV/EBITDA is superior.
Price is a market capitalization linked term – P/E makes no adjustment for companies that are capitalized with lots of debt or companies with lots of cash on the balance sheet. On the other hand, Enterprise Value better reflects the whole market value of a company – many companies "look" cheap on a P/E ratio basis until you dig into the books.
Earnings and EBITDA both have their strengths and weaknesses. Earnings are generally based on accounting standards (GAAP or IFRS, usually) and tell a specific story of a company's earnings power. EBITDA might show something very different – perhaps a company with strong cash flows hidden by large amortization or depreciation or a company with a structure that causes it to pay too much interest or taxes. EV/EBITDA might reveal companies to research further for a basic screen – there can be deep value in the details.
EV/EBIT, as an alternative, can be even closer to earnings reality. Amortization and depreciation may be accounting fiction, but companies spent that money at one point – and companies that need to continue to spend to grow, or purchase other companies as a strategy need adjustment.