Enterprise value multiple, also known as Enterprise Multiple in English, often abbreviated as EV/EBITDA, calculates the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization and is used to value a company. Enterprise value multiples are sometimes referred to as "EBITDA multiples." In the calculation of enterprise value multiple, enterprise value indicates the total value of a company including stock sales and debt. Earnings before interest, taxes, depreciation and amortization is a profitability indicator that takes into account the company's interest expenses, tax expenses, depreciation and amortization. Since both select relatively more comprehensive values, they eliminate value differences between companies with different asset types, different tax types, etc. Therefore, enterprise value multiples can provide a fairer assessment of the investment or acquisition value of different companies. When the enterprise value multiple is low, the company's own stock price is considered to be undervalued, which is usually a signal that it is worth investing. For comparing different companies, it also shows that the company's extrinsic value is low relative to its own profitability, and it is a good time to make acquisitions. That is, you can buy a company with good profitability at a lower price. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a financial indicator that measures a company's profitability. It takes into account interest expenses, tax expenses, and depreciation and amortization of long-term investments during operations to obtain a more complete financial value of profitability. The calculation method is: EBITDA = operating profit + depreciation and amortization All parameters required to calculate EBITDA can be found in the profit and loss statement, other income/expense statement and cash flow statement in the company's financial report. Enterprise value multiple calculation example This chapter will perform example calculations by using Apple’s financial report released in September 2021: The profit and loss statement, other income/expense statement, and cash flow statement in AAPL's financial report are as follows: Information such as operating profit and number of common shares can be obtained from the income statement. The list is as follows: Operating income$114,301 million Number of common shares Shares used in computing earnings per share (Basic)15,744,231 Thousand shares From the cash flow statement, you can find depreciation and amortization expenses, listed below: Depreciation and amortization$11,519 million From the balance sheet, you can find data on cash and cash equivalents, short-term debt, and long-term debt. The list is as follows: Cash and cash equivalentsCash and cash equivalents$29,965 million Marketable securities (note: this item is also classified as cash and cash equivalents) $31,590 million Total cash and cash equivalents = $29,965 million + $31,590 million = $61,555 million Current liabilities: term debt$9,822 million Long-term debtNon-current liabilities: term debt$95,281 Total debt = $9,822 million + $95,281 = $105,101 million Apple's current share price can be found on its investment finance portal: Stock closing price $171.21 Let’s first calculate Apple’s current enterprise value: Enterprise Value = Market Capitalization + Total Debt – Cash and Cash Equivalents = 15,744,231 thousand shares x $171.21 + $105,101 million – $61,555 million = $2.739 billion Next, calculate Apple’s EBITDA: EBITDA = operating profit + depreciation and amortization = $114,301 million + $11,519 million = $125,820 million
Therefore, Apple’s enterprise value multiple is: Enterprise value multiple = enterprise value / earnings before interest, taxes, depreciation and amortization = $2.739 billion / $125,820 million = 21.8 That is, Apple's current enterprise value multiple is 21.8. What is the guiding significance of enterprise value multiples? Because the enterprise value multiple includes a company's debt and equity, it can more fully reflect the company's overall business performance. Enterprise value multiples can be used to compare industry averages. If a company's multiple is higher than the industry average, it could mean the company is overvalued; if it's lower than the average, it could be undervalued. At the same time, by looking at the long-term trend of a company's enterprise value multiple, you can better understand the changes in corporate valuation. If the current multiple is significantly higher than the historical average, it may indicate that the current valuation is too high. In actual use, enterprise value multiples still have shortcomings. In specific use, you need to comprehensively consider multiple financial indicators to conduct a more comprehensive valuation analysis of the company. The EBITDA used in the enterprise value multiple covers almost all revenue, but inversely masks some investment costs, so companies with negative net profits may also have higher EBITDA. The result is that if one only considers the enterprise value multiple, the company would be considered undervalued (because EBITDA is higher). However, if you consider the price-to-book ratio or net profit margin, you may find that they are all negative, so you need to be cautious when investing. Enterprise value multiple vs price to earnings ratio Price-to-Earnings Ratio in English, or P/E Ratio for short, is a measure of the ratio between a company's market value and net profit, that is: Price-to-Earnings Ratio = Market Value / Net Profit. When used to evaluate the investment value of a company's stock price, a combination of enterprise value multiples and price-to-earnings ratios can be used for comprehensive evaluation. When evaluating, the higher the ratio, it means that the company's stock price is overvalued, and it is not a suitable time to invest. The lower the ratio, it means that the stock price is undervalued, and it is often a suitable time to buy and invest. The difference between the two is: Enterprise MultipleP/E ratio Calculation method Enterprise value / EBITDA Market capitalization / net profit Assessment content Assess company profitability and stock valuation Used when conducting mergers and acquisitions, valuations, and cross-industry comparisons of companies Scope of application Suitable for companies with stable profits Applicable to companies of different sizes and debt levels More investment guides What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is company profit? Gross profit, operating profit, net profit What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio