It is not a secret that enterprise value (EV) to the earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio varies by industry. However, it is essential to note that the EV/EBITDA for the S&P 500 has typically averaged 11 to 14 over the last few years. EV measures the company’s total value, while EBITDA gauges a firm’s overall financial performance.
Significantly, analysts and investors consider value below 10 of EV/EBITDA to be healthy and above average. However, how can investors use the EV/ EBITDA metric to analyze stock?
Firstly, investors and analysts use the EV metric to calculate a firm’s total monetary value of the assessed value. Although some investors only look at a company’s market cap to determine a company’s value. Some investors consider that the enterprise value metric gives complete information of a firm’s true worth. EV metric also takes into consideration the amount of debt the company carries and its cash reserves.
If the company value is below 10, it is healthy
To calculate EV, you need to determine the company’s market capitalization. We do it by multiplying the company’s outstanding shares by the current market price of one share. Afterward, you need to add the firm’s total long-term and short-term debt and subtract its cash and cash equivalents.
Investors ofter use EBITDA to measure a company’s overall financial performance. We can calculate EBITDA by using the numbers of a company’s balance sheet and income statement. The metric helps investors compare a company against industry averages and other businesses. To calculate EBITDA for a company, the investor will need first to find the firm’s assets. These include the earnings, tax, and interest figures on the firm’s income statement. You can find the depreciation and amortization amounts in the cash flow statement and use operating profit.
Remarkably, The EV/EBITDA ratio is a well-known metric. Investors use it as a valuation tool to compare the company’s value, debt included, to the company’s cash earnings less non-cash expenses. Analysts and investors often use that metric to determine the best players in the industry. We can calculate the EV/EBITDA ratio by dividing EV by EBITDA. If the company values below 10, it is healthy.