Formula
EV/EBITDA = enterprise value ÷ EBITDA
Enterprise value = market cap + net debt. EBITDA = operating income + depreciation + amortization of intangible assets. With an enterprise value of KRW 10 trillion and EBITDA of KRW 1 trillion, EV/EBITDA is 10.
Definition
EV/EBITDA is enterprise value (EV) divided by EBITDA. EV is market cap plus net debt (debt minus cash), close to the cost of acquiring the whole company including its debt. EBITDA is operating income before interest, taxes, depreciation and amortization of intangible assets, close to the cash-generating power of the core business.
If PER looks only at market cap and the net income going to shareholders, EV/EBITDA compares the value of the whole enterprise, debt included, with cash flow from the core business. It is therefore used as a yardstick that reduces the distortions of PER when comparing companies with large debt and depreciation.
Jupick does not put EV/EBITDA directly into the grade, but treats it as a reference metric for comparing companies with different capital structures on the same yardstick. It is used especially often to value companies in mergers and acquisitions.
How to read it
A lower EV/EBITDA amounts to acquiring the whole enterprise at a lower price relative to the cash-generating power of its core business. Because net debt is included, a company with a lot of debt comes out higher than on PER, which looks only at market cap.
Because EBITDA adds back depreciation, it is especially meaningful for comparing sectors with heavy depreciation from large capital spending, such as telecoms, steel and energy. Depreciation is ultimately real investment spending, though, so EBITDA does not always equal cash flow.
The normal range of EV/EBITDA also differs by sector. Comparing within the same sector and reading it with other yardsticks such as PER or PSR is safer.
Points to watch
- Because EBITDA adds back depreciation, it can hide investment that is actually needed and make cash flow look better than it is.
- Data sources use different definitions of debt and cash for net debt, so EV can differ by source.
- Normal ranges differ widely by sector, so EV/EBITDA is hard to compare across sectors as is.