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EV and EV/EBITDA
The EV/EBITDA metric is a popular valuation tool that helps investors compare
companies to make an investment decision. EV calculates a company's total value or
assessed worth, while EBITDA measures a company's overall financial performance
and profitability.
EV (which is the sum of market capitalization, preferred shares, minority shares, debt
minus cash) to EBITDA is the ratio between enterprise value and Earnings Before
Interest, Taxes, Depreciation, and Amortization that helps the investor in the valuation
of the company at a very subtle level by allowing the investor to compare a particular
company to the parallel company in the industry as a whole, or other comparative
industries.
Enterprise value
Enterprise Value, or EV, shows a company’s total valuation. EV is used as a better
alternative to market capitalization. The value calculated as the Enterprise Value is
considered better than market capitalization because it is calculated by adding more
vital components to the market capitalization value.
EV = Market Cap + Debt + Minority Interest + Preference Shares – Cash & Cash
Equivalents.
EBITDA
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is used to
represent an organization’s financial performance. With the help of this, we can find
out the potential of a particular firm in terms of the profit its operations can make.
EV to EBITDA Valuation