EV/EBITDA:

So, the "Enterprise multiple" as they call it, EV/EBITDA, is essentially a metric investors use to determine the overall valuation of the company.

It takes the enterprise value of a company and divides it by its EBITDA.

Enterprise value is simply the company's market cap, add in its short term and long term debt, and subtract the cash and cash equivalents the company has. Enterprise value is used a lot in potential takeovers or acquisitions, as its very often that a company will assume the debt of the acquired, so it should be factored in.

So, the enterprise multiple essentially aims to compare a company's market cap, debts and cash to its EBITDA (Earnings BEFORE interest, taxes, depreciation and amortization).

Whereas the price to earnings multiple simply takes the company's market cap (which does not include cash, debts) and divides it by its earnings per share (which is a calculation that is made AFTER interest, taxes, depreciation and amortization).

So a quick highlight on how this could be different for different companies. An oil and gas company here in Canada may be taxed differently than one in the United States, and be prone to different interest rates on debt. So, the EV/EBITDA ratio would reflect this, because it strips out financing costs (debt) and taxes. Whereas the price to earnings ratio does not strip these costs out. And, different interest rates on debt and different taxes will definitely have an impact on a company's bottom line (earnings).

So, what you could take from all of this is that EV/EBITDA paints a little clearer picture on the true valuation of a company. However, it gets quite complex because it really depends on how the debt is being used. For example, a company with a high amount of debt will have a higher EV/EBITDA ratio, and it may look overvalued. However what if it is using that debt to fuel growth in a high capital expenditure industry, like oil and gas or telecom?

That's why it's REALLY important to use valuation metrics to compare companies in the same industry, or against industry averages.

I hope this made sense? Let me know if it doesn't I can explain further.

So, the "Enterprise multiple" as they call it, EV/EBITDA, is essentially a metric investors use to determine the overall valuation of the company.

It takes the enterprise value of a company and divides it by its EBITDA.

Enterprise value is simply the company's market cap, add in its short term and long term debt, and subtract the cash and cash equivalents the company has. Enterprise value is used a lot in potential takeovers or acquisitions, as its very often that a company will assume the debt of the acquired, so it should be factored in.

So, the enterprise multiple essentially aims to compare a company's market cap, debts and cash to its EBITDA (Earnings BEFORE interest, taxes, depreciation and amortization).

Whereas the price to earnings multiple simply takes the company's market cap (which does not include cash, debts) and divides it by its earnings per share (which is a calculation that is made AFTER interest, taxes, depreciation and amortization).

So a quick highlight on how this could be different for different companies. An oil and gas company here in Canada may be taxed differently than one in the United States, and be prone to different interest rates on debt. So, the EV/EBITDA ratio would reflect this, because it strips out financing costs (debt) and taxes. Whereas the price to earnings ratio does not strip these costs out. And, different interest rates on debt and different taxes will definitely have an impact on a company's bottom line (earnings).

So, what you could take from all of this is that EV/EBITDA paints a little clearer picture on the true valuation of a company. However, it gets quite complex because it really depends on how the debt is being used. For example, a company with a high amount of debt will have a higher EV/EBITDA ratio, and it may look overvalued. However what if it is using that debt to fuel growth in a high capital expenditure industry, like oil and gas or telecom?

That's why it's REALLY important to use valuation metrics to compare companies in the same industry, or against industry averages.

I hope this made sense? Let me know if it doesn't I can explain further.