Enterprise value/EBITDA ratio (EV/E)

Definition:

The EV/EBITDA ratio, also known as the enterprise multiple, is the ratio of a company's enterprise value to its earnings before non-cash items and is commonly used to value possible takeover targets. Although similar to the P/E ratio, there are two aspects of the EV/E ratio that make it a more accurate measurement of a company's true value: the inclusion of EBITDA in the ratio allows for a comparison of earnings between different industries by omitting the effects of interest and taxes on earnings, which vary between industries; the enterprise value, on the other hand, uses net debt in its calculation, which allows for the EV/E ratio to be used to compare companies with different capitalization structures. See: EBITDA, Enterprise multiple, Takeover

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

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