The enterprise-value-to-EBITDA ratio varies by industry. However, the EV/EBITDA for the S&P 500 has typically averaged from 11 to 14 over the last few years. As of the end of 2017, the average EV/EBITDA for the S&P was 12.75. As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.
The EV/EBITDA Multiple
The enterprise-value-to-EBITDA ratio is calculated by:
- EV divided by EBITDA or earnings before interest, taxes, depreciation, and amortization
- EV (the numerator) is the company’s enterprise value (EV) and is calculated as follows:
- EV = market capitalization + preferred shares + minority interest + debt – total cash
This popular metric is used as a valuation tool to compare the value of a company, debt included, to the company’s cash earnings less noncash expenses. It’s ideal for analysts and investors looking to compare companies within the same industry.
Typically, EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investors to determine companies with the healthiest EV/EBITDA within a specific sector.
Benefits of EV/EBITDA Analysis
Just like the P/E ratio (price-to-earnings), a lower EV/EBITDA, the cheaper the valuation for a company. Although the P/E ratio is typically used as the go-to-valuation tool, there are benefits to using the P/E ratio along with the EV/EBITDA. For example, many investors look for companies that have both low valuations using P/E and EV/EBITDA and solid dividend growth.