What Is EV/EBITDA?
The EV/EBITDA multiple is a widely used financial valuation metric within the broader category of Financial Valuation and Financial Metrics. It provides a comprehensive measure of a company's total value relative to its operational earnings. Specifically, EV/EBITDA compares a company's Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This ratio offers insights into a company's profitability and relative worth, making it a key tool for investors and analysts in assessing potential acquisition targets or comparing firms within the same sector.
History and Origin
The use of valuation multiples has evolved over time, with EV/EBITDA gaining significant traction, particularly in the realm of Mergers & Acquisitions (M&A) and Leveraged Buyout (LBO). This multiple became a prominent metric for evaluating private equity deals and LBOs in the 1980s, a practice that continues to this day19. Its emergence reflected a need for a valuation tool that could standardize comparisons between companies with varying Capital Structures, as it focuses on operational profitability before the effects of financing and taxes. Michael J. Mauboussin, in his paper "What Does an EV/EBITDA Multiple Mean?", discusses the theoretical underpinnings and evolution of valuation multiples, including EV/EBITDA18.