Enterprise Value (EV) = Market Cap + Total Debt − Cash & Equivalents EV/EBITDA = Enterprise Value ÷ EBITDA
The Short Version
EV/EBITDA is a valuation ratio that's especially useful for comparing companies with different debt levels or tax situations, because it looks at the whole business (including debt) rather than just the equity (share) price. It's widely used in mergers & acquisitions and cross-company comparisons.
Explain It Like I'm 10
Imagine buying a used car. The sticker says $10,000 (like the 'market cap' — just the share price side), but the car also comes with a $2,000 loan you'd have to take over (debt) and a $500 gift card taped to the dashboard (cash). Your TRUE cost to fully own the car is $10,000 + $2,000 − $500 = $11,500 — that's like 'Enterprise Value': the full real price of taking over the whole thing, debts and all. EV/EBITDA compares that true full price to how much operating profit the business (or car, in this silly example) actually generates.
Step-by-Step Example
- 1 Market cap: $800,000,000.
- 2 Total debt: $300,000,000. Cash on hand: $100,000,000.
- 3 Enterprise Value = $800,000,000 + $300,000,000 − $100,000,000 = $1,000,000,000.
- 4 EBITDA (operating profit before interest, taxes, depreciation, amortization): $125,000,000.
- 5 Divide: EV/EBITDA = $1,000,000,000 ÷ $125,000,000 = 8.0×.
- 6 A lower multiple compared to similar companies can suggest the whole business is priced more cheaply relative to its operating profit.
Quick Recap
- ✓ EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization — defined in detail in the Accounting guide.
- ✓ Lower EV/EBITDA relative to peers can suggest a stock is undervalued, all else equal.