EV/Ebita ratio

EV/Ebita is a valuation method often used by analysts, sometimes used instead of the p/e ratio to compare growth between firms in heavy debt sectors

EV/Ebita is a valuation method often used by analysts. Enterprise value (EV) combines a firm's equity (its market capitalisation the number of shares multiplied by the share price) and net debt on the balance sheet (long- and short-term debt less cash).

So if a firm has a market cap of £100m, long and short-term debt of £50m, and cash of £10m, its EV is £140m (100 + 50 10). This can be compared to earnings before interest, tax and amortisation (Ebita) to give a valuation ratio called EV/Ebita.

This is sometimes used instead of the p/e ratio to compare growth between firms in heavy debt sectors, such as telecoms. So if Ebita is £20m, the EV/Ebita ratio becomes seven (140/20). If the sector average is ten, the firm might look cheap.

See Tim Bennett's video tutorial: Beginner's guide to investing: enterprise value.

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022