EV/EBITDA (Enterprise Multiple) better than P/E ratio for value investors

A Superior Metric for Value Investors

Excerpt:

Enterprise value (EV) is calculated in the following way:

EV = Market Cap + Total Debt + Preferred Stock + Minority Interest – Cash

This gives us a theoretical takeover value, which is similar to how an investment banker might value the company.

The denominator of the ratio is EBITDA, which stands for earnings before interest, taxes, depreciation and amortization.

Basically, it’s the earnings that are available to all stakeholders. Similar to the P/E ratio, a lower EV/EBITDA represents a cheaper valuation, all else equal.

Luckily, the EV/trailing EBITDA ratio can be found on the Yahoo! Finance Key Statistics page, so we don’t have to dig through financial statements.

.... The median EV/EBITDA ratio for the S&P 500 is currently 11.4x. If we own a stock with a much higher multiple, there better be a really good reason.

Comment: So ... low EV/EBITDA is preferred. See samples above. Also known as the Enterprise Multiple

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Some other links:

• EV/EBITDA Screener
• PDF Article
• The Single-Best Metric: EV/EBITDA