# Understanding Enterprise Multiple (EV/EBITDA): A Financial Valuation Guide

## What Is Enterprise Multiple?

The enterprise multiple (EV/EBITDA) is a key ratio used to assess a company's value by considering its debt alongside [earnings before interest, taxes, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp). This metric is particularly valuable for potential acquirers as it includes the debt they would assume and the cash they would receive, offering a comprehensive view of the company's economic value. Understanding whether an enterprise multiple is favorable or not typically depends on industry norms, as variations can occur between high-growth sectors like biotech and slower-moving industries such as railways.

### Key Takeaways

*   The Enterprise Multiple (EV/EBITDA) is a key financial metric used to evaluate the value of a company by including debt and excluding cash, making it a useful tool for assessing potential acquisitions.
*   This ratio allows investors to compare companies across different industries and regions by eliminating the effects of varying tax policies and capital structures.
*   A lower enterprise multiple compared to industry peers or historical averages may suggest that a company is undervalued, whereas a higher multiple might indicate overvaluation.
*   Investors should be cautious of "value traps" where a low multiple might seem attractive, but the underlying business fundamentals do not support potential growth or recovery.
*   The Enterprise Multiple is more comprehensive than market capitalization alone, as it captures the full economic value of a company considering both its debts and available cash.

![Enterprise Multiple (EV/EBITDA)](https://www.investopedia.com/thmb/3lV4v50FanuGQLcICn2AftWQK14=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/DDM_INV_enterprise-multiple_final-38908eeda9f14f4097ed6f81d2e3b2c4.jpg)

*— Investopedia / Eliana Rodgers*

## Understanding the Enterprise Multiple Formula and Calculation

﻿ $\begin{aligned} &\text{Enterprise Multiple} = \frac { \text{EV} }{ \text{EBITDA} } \\ &\textbf{where:}\\ &\text{EV} = \text{Enterprise Value} = \text{Market capitalization} \ + \\ &\text{total debt} - \text{cash and cash equivalents} \\ &\text{EBITDA} = \text{Earnings before interest, taxes, depreciation} \\ &\text{and amortization} \\ \end{aligned}$﻿

#### Enterprise Multiple: My Favorite Financial Term

## Insights Gained From Enterprise Multiple Analysis

Investors use the enterprise multiple to assess if a company is undervalued or overvalued. A low ratio compared to peers or historical averages suggests [undervaluation](https://www.investopedia.com/terms/u/undervalued.asp), while a high ratio suggests overvaluation.

An enterprise multiple is useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies. It's also used to find attractive [takeover](https://www.investopedia.com/terms/t/takeover.asp) candidates since [enterprise value](https://www.investopedia.com/terms/e/enterprisevalue.asp) includes debt and is a better metric than [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) for merger and acquisition (M&A) purposes.

Enterprise multiples can vary depending on the industry. It is reasonable to expect higher enterprise multiples in high-growth industries (e.g. biotech) and lower multiples in industries with slow growth (e.g. railways).

Enterprise value (EV) measures a company's economic [value](https://www.investopedia.com/ask/answers/072915/how-can-evebitda-be-used-conjunction-pe-ratio.asp), often used to assess acquisition value. It is considered to be a better valuation measure for M&A than a market cap since it includes the debt an acquirer would have to assume and the cash they'd receive.

## Practical Example: Using Enterprise Multiple with Dollar General

Dollar General ([DG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=dg)) generated $3.86 billion in EBITDA for the [trailing 12 months (TTM)](https://www.investopedia.com/terms/t/ttm.asp) as of the year ended Jan. 28, 2022. The company had $344.8 million in cash and cash equivalents and $14.25 billion in total debt for the same ended year.

The company's market cap was $56.2 billion as of April 4, 2022. Dollar General's enterprise multiple is 18.2 \[($56.2 billion + $14.25 billion - $344 million) / $3.86 billion\]. At the same time last year, Dollar General's enterprise multiple was 17.4. The rise in the enterprise multiple is mainly due to a nearly $1 billion cash decrease, alongside a $300 million drop in EBITDA. This example shows how the Enterprise Multiple considers both available cash and company debt.

## Recognizing the Limitations of Enterprise Multiple Analysis

An enterprise multiple is a metric used for finding attractive buyout targets. But, beware of [value traps](https://www.investopedia.com/terms/v/valuetrap.asp)—stocks with low multiples because they are deserved (e.g. the company is struggling and won't recover). This creates a false sense of value, but industry or company fundamentals may indicate [negative returns](https://www.investopedia.com/terms/n/negative-return.asp).

Investors assume that a stock's past performance is indicative of future returns and when the multiple comes down, they often jump at the opportunity to buy it at a "cheap" value. Knowledge of the industry and company fundamentals can help assess the stock's actual value.

One easy way to do this is to look at expected (forward) profitability and determine whether the projections pass the test. Forward multiples should be lower than the TTM multiples. Value traps occur when these forward multiples look overly cheap, but the reality is the projected EBITDA is too high and the stock price has already fallen, likely reflecting the market's cautiousness. Therefore, it's important to understand the key drivers for the company and industry.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Dollar General, Form 10-K for the Fiscal Year Ended January 28, 2022](https://investor.dollargeneral.com/websites/dollargeneral/English/310010/us-sec-filing.html?shortDesc=Annual%20Report&format=convpdf&secFilingId=b365ead3-a988-4299-9d85-8bfa86ca3ca4)." Page 43.
>     
> 2.  Macrotrends. "[Dollar General Market Cap 2010-2024, DG](https://www.macrotrends.net/stocks/charts/DG/dollar-general/market-cap)."