EV/EBITDA (Enterprise value/EBITDA) is a popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.
An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt.
The EV/EBITDA multiple requires prudent use for companies with low profit margins; i.e. for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability.
Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest, i.e. as a benchmark. An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.
The reciprocate multiple EBITDA/EV is used as a measure of cash return on investment.
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