EV to EBITDA

EV/EBITDA is a valuation multiple that compares Enterprise Value with EBITDA. It is one of the most common factors used to compare company valuations. Because EBITDA excludes financing and depreciation effects, the multiple makes companies easy to compare.

It is applied in two directions: a valuation level is derived from observed factors for comparable listed companies or comparable transactions, and conversely a negotiated price is translated into a factor in order to place it in context. Consistency matters in the derivation: enterprise value is measured at a reference date. EBITDA needs a consistent period, such as the last twelve months or a clearly identified forecast period, and a comparable definition of adjustments. Multiples from control transactions may include control premiums and buyer-specific synergies. These matter when comparing them with trading multiples, but do not make every transaction multiple higher. The level is driven above all by size, growth, margin, recurrence of revenue, dependence on individuals and customers, and by conditions in credit markets. Smaller companies regularly trade at a marked discount. The multiple's weakness is the very feature that makes it popular: because depreciation is excluded, it treats capital-intensive and asset-light businesses alike, even though their available cash flow differs sharply.

In practice it is therefore supplemented by EV/EBIT, cash conversion and a discounted cash flow valuation. Selecting the peer group is the most effective lever in the derivation and therefore the first thing to check in a valuation. Adding or removing two or three companies shifts the median noticeably. Disclosing the selection criteria and showing the range alongside the median has therefore proven itself. Timing also matters, because valuation levels move with capital markets and a factor from a different market phase cannot be transferred without adjustment.