Enterprise value (EV) multiples

Definition

Enterprise Value (EV) multiples are financial metrics used to assess a company's value relative to its earnings, revenue, or other financial performance measures. They help investors compare different companies within the same industry.

5 Must Know Facts For Your Next Test

1. EV multiples include ratios like EV/EBITDA, EV/Sales, and EV/EBIT.
2. EV multiples provide a more comprehensive valuation than market capitalization alone because they account for debt and cash.
3. Lower EV multiples can indicate undervaluation, while higher multiples might suggest overvaluation relative to peers.
4. EV is calculated as Market Capitalization + Total Debt - Cash and Cash Equivalents.
5. They are particularly useful for comparing companies with different capital structures.

Review Questions

• What components are included in the calculation of Enterprise Value?
• Why might an investor prefer EV multiples over P/E ratios?
• Name three common types of EV multiples.

Related terms

Market Capitalization: The total market value of a company's outstanding shares of stock.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company's overall financial performance.

P/E Ratio: Price-to-Earnings ratio; a valuation metric that compares a company's share price to its earnings per share.