How to use the EV/EBITDA calculator
Multiple measures what the market pays today. Implied price runs the calculation in reverse.
- Enterprise value. Build it from share price, diluted shares, total debt, cash and any preferred or minority interest, or enter a figure you already have. Totals are in millions of dollars.
- EBITDA. Enter it directly, or choose operating income plus depreciation and amortization (D&A) from the cash flow statement. Use the last 12 months for a trailing multiple, or an estimate for next year for a forward multiple.
- D&A (optional). With it, the calculator also shows EV/EBIT.
- For an implied price, enter EBITDA, a target multiple (a peer average or the company’s historical average), net debt and diluted shares. The current price is optional.
The formulas
EBITDA = Operating income (EBIT) + Depreciation & amortization
EBITDA yield = EBITDA ÷ Enterprise valueEnterprise value = market cap + debt + preferred equity + minority interest − cash.
Equity value = Implied EV − Net debt
Implied price = Equity value ÷ Diluted sharesNet debt here includes preferred equity and minority interest, less cash.
A worked example
Company B trades at $36 with 400 million shares, a market cap of $14.40B. It owes $4,200M and holds $1,100M of cash, so enterprise value is $17.50B. EBITDA is $1,750M.
EV/EBITDA = $17.50B ÷ $1,750M = 10.0×, an EBITDA yield of 10.0%. With $500M of D&A, EV/EBIT is 14.0×.
If similar companies trade at 9 times EBITDA, the implied enterprise value is $15.75B. Subtracting $3,100M of net debt leaves $12.65B, or $31.63 a share, a change of -12.2% from the $36 price. At 12 times EBITDA the same company would be worth $44.75.
Each turn of the multiple is worth $4.38 a share here, which is why small disagreements about the right multiple produce large differences in value. The table under the calculator shows the price at every multiple from 6× to 20×.
Why EV/EBITDA ignores capital spending
EBITDA is earnings before depreciation and amortization, and depreciation is how accounting spreads the cost of past capital spending over time. Leaving it out makes EBITDA a rough measure of operating cash generation and lets companies with different asset ages and accounting policies be compared. It also means a business that must spend heavily on equipment just to stand still looks as cheap as one that barely needs to invest.
EV/EBIT charges depreciation as a cost and exposes the difference. Keeping Company B’s enterprise value and EBITDA the same:
| D&A | EV/EBITDA | EV/EBIT |
|---|---|---|
| $150M (light assets) | 10.0× | 10.9× |
| $500M (the example) | 10.0× | 14.0× |
| $1,000M (capital-heavy) | 10.0× | 23.3× |
All three look identical on EV/EBITDA. On EV/EBIT the capital-heavy version costs 23.3× its operating profit, more than twice the light-asset version. When companies in a comparison have very different capital needs, look at EV/EBIT or free cash flow alongside EV/EBITDA.
Common mistakes
- Mixing periods. Use EBITDA for the same 12 months as the balance sheet date, or label the result clearly as a forward multiple.
- Adjusted EBITDA. Company-reported “adjusted” figures often add back stock compensation, restructuring and other recurring costs. They make the multiple look lower than it is.
- Leases. Under current US accounting, operating lease costs sit above EBITDA for most companies. If you add lease liabilities to debt, add the lease cost back to EBITDA as well, or the multiple is distorted.
- Using equity value in the numerator. Market cap ÷ EBITDA mixes a value for shareholders only with earnings that belong to lenders too.
Limitations
EBITDA ignores taxes, interest, working capital and capital spending, all of which reduce the cash an owner actually receives. A multiple also says nothing about growth: a company growing quickly deserves a higher multiple than a shrinking one. Use EV/EBITDA to compare similar companies, and a DCF when you want a value built from cash flows.