Enterprise Value to EBITDA (EV/EBITDA)

EV/EBITDA is the ratio between a company's enterprise value and earnings before interest, taxes, depreciation, and amortization. Enterprise Value (EV) is calculated by adding market capitalization to debt and subtracting cash and cash equivalents, while EBITDA calculates earnings from a company's core operations less tax, interest, depreciation, and amortization.

This ratio can be used to compare the value of multiple businesses and can be particularly helpful when comparing businesses from different geographies because it disregards the implications of varied tax regulations and other location-based differences. EV/EBITDA is mainly used by investors to evaluate a company before acquisition to determine how much they would have to pay for a single dollar of earnings.

In the most simplistic view, a company with low EV/EBITDA can be considered low risk for acquisition, because it suggests that the stock is undervalued and that you would have to spend less for each dollar earned. However, a higher EV/EBITDA could also be a symptom of high growth where current earnings are low, with a promise of future earnings. What is considered a low or high EV/EBITDA depends on industry.