EV/EBITDA: The Multiple Professionals Reach for First

You, know, that, Enterprise, Value, adjusts, a, company's, price, tag, for, its, debt, and, cash., The, formula, is, EV, =, Market, Cap, +, Debt, −, Cash., EV/EBITDA, pairs, this, adjusted, price, with, an, earnings, number, calculated, similarly., EBITDA,, or, Earnings, Before, Interest,, Taxes,, Depreciation,, and, Amortization,, shows, what, a, company, earned, before, financing, decisions,, taxes,, and, non-cash, charges, affect, the, picture., Combine, these, two, and, you, get, the, first, multiple, professionals, use, when, comparing, companies, that, don't, have, the, same, capital, structure., And, that’s, almost, always.

Here’s, how, it, works., Interest, expense, lies, between, EBITDA, and, net, income, on, the, income, statement., This, means, it, drags, down, net, income, (and, thus, the, P/E), for, a, heavily, indebted, company,, without, impacting, EBITDA., Imagine, two, companies, running, the, same, operating, business,, both, generating, $200, million, of, EBITDA., Company, A, has, no, debt., Company, B, has, $500, million, of, debt, at, 6%, interest,, costing, it, $30, million, a, year., That, $30, million, cuts, straight, from, Company, B's, net, income,, making, its, P/E, look, worse, than, Company, A's., Yet, both, companies, perform, identically, in, operations., EV/EBITDA, avoids, this, issue:, EBITDA, is, the, same, $200, million, for, both,, as, is, EV,, which, already, factors, in, each, company's, debt., It, adjusts, on, the, price, side, rather, than, the, earnings, side.