What Does EV/EBITDA Mean?
EV/EBITDA is enterprise value divided by earnings before interest, tax, depreciation and amortization. This ratio is a commonly used valuation multiple for both private and publicly traded companies. The equation can be widely used as a proxy for value across many business because by using EBITDA it excludes consideration of differing capital structures and tax rates between organizations.
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Divestopedia Explains EV/EBITDA
EV/EBITDA is a valuation multiple that is used to determine the valuation of a private or public company. The appropriate EV/EBITDA to apply to a target company that is being valued can be determined using two different market based methods:
- Precedent transaction analysis whereby valuation metrics from transactions in similar industries are gathered and used a a proxy for a target company; or
- Comparable company analysis whereby valuation metrics from publicly traded companies of similar size, regions and industry sectors are computed and applied to the metrics of a target company.
So as an example, the average EV/EBITDA multiple determined in a precedent transaction analysis is 5.0x and the average EV/EBITDA multiple from comparable company analysis is 5.5x. These multiples can be applied to a private company target that has EBITDA of $5 million to estimated an enterprise value (EV) between $25 million and $27.5 million.