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.

Recommended

Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
21 Sep 2020
Price to sales ratio
Glossary

Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price/sales ratio.
28 Aug 2020
Too embarrassed to ask: what is a p/e ratio?
Too embarrassed to ask

Too embarrassed to ask: what is a p/e ratio?

Find out how to use the price/earnings ratio (p/e ratio for short) – a useful starting place for investors looking to value a company.
26 Aug 2020
Stock split
Glossary

Stock split

A stock split increases the number of a corporation's issued shares by dividing each existing share.
21 Aug 2020

Most Popular

The next 20 years: five new technologies on the horizon
Global Economy

The next 20 years: five new technologies on the horizon

What will everyday life be like in two decades’ time? Matthew Partridge peers into his crystal ball.
12 Nov 2020
This week’s rally in value stocks is just the beginning
Value investing

This week’s rally in value stocks is just the beginning

The arrival of a vaccine this week saw huge gains in the markets and investors switching out of big-tech growth stocks and into “value” stocks in more…
13 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Nov 2020