EV/EBITDA
EV/EBITDA is a valuation multiple that is often used in parallel with, or as an alternative to, the P/E ratio. The term EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, Amortization.
An advantage of this multiple is that it is capital structure-neutral.[1] Therefore, this multiple can be used for direct cross-companies application.
A drawback of this multiple is that it ignores profitability, which is usually considered a critical value driver. In this respect, the EV/EBITDA multiple requires prudent use for companies with low profit margins, resulting in artificially high multiples.[2]
Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to benchmark against. An index now exists providing an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.[3]
The reciprocate multiple EBITDA/EV is used as a cash return on investment.
[edit] See also
- Revenue
- Gross profit
- Earnings before interest and taxes (EBIT), or operating profit
- Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs (EBITDAR)
[edit] References
[edit] External links
- EV/EBITDA on Investopedia.com
- The Hindu Business Line: How retail investors can profit from EV/EBITDA
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