EBITDA multiple (EV/EBITDA) is a financial ratio used to compare the enterprise value of a company to its annual EBITDA figure. It is a commonly used valuation metric to determine the value of a company when performing a comparable company analysis or precedent transaction analysis. The EBITDA multiple normalizes the impact of capital structure, taxation, fixed assets, etc. of different companies, which allows a side-by-side comparison of their values.
The formula for calculating the EBITDA multiple is:
EBITDA Multiple = Enterprise Value / EBITDA
Enterprise Value = Market Capitalization + Debt + Minority Interest + Preferred Shares - Cash and Cash Equivalents
The EBITDA multiple is a proxy that investors use to determine whether a company is undervalued or overvalued. When the multiple is low, it means that a company is undervalued, and vice versa.