Enterprise value to EBITDA varies depending on the industry. However, the EV/EBITDA for companies in the S&P 500 and, as a rule, the average from 11 to 14 over the past few years. As of the end of 2017, the average EV/EBITDA for companies in the S&P was 12.75. As a rule, in units of EV/EBITDA value below 10 is usually interpreted as healthy and above average by analysts and investors.
Enterprise value to EBITDA is calculated by the formula:
- EV divided by EBITDA , or earnings before interest, taxes, depreciation and amortization
- EV (numerator) is the enterprise value (EV) and is calculated as follows:
- At EV = market capitalization + preferred stock + minority interest + debt – cash total
This popular metric is used as an evaluation tool for comparison of enterprise value, debt included cash income of the company less non-cash expenses. It is ideal for analysts and investors looking to compare firms within the same industry.
Usually at EV/EBITDA values below 10 are seen as healthy. However, when comparing relative values between companies within the same industry is the best way for investors to identify companies with healthy EV/EBITDA within a particular sector.
The advantages of EV/EBITDA analysis
Just as the P/E ratio (price-earnings), the lower the EV/EBITDA to reduce the cost to the company. Although the ratio R/E is typically used as a to go to the assessment tool, there are advantages to using a ratio of P/E together with EV/EBITDA of the company. For example, many investors are looking for companies that have low valuation using P/E and EV/EBITDA and sustainable dividend growth.