Earnings Ratio For the above hypothetical example. the P/E ratio would be However. the company would ha than net income. However. enterprise value could be higher or lower than market capitalization. depending on whether a company holds net cash. or uses debt. Key fact: A company’s market capitalization and enterprise value would be equal if the cash balance equals the debt balance outstanding. assuming there were no minority interests or preferr shares outstanding. Pros And Cons Of EV/EBITDA While most investors first learn about EPS and the Price/Earnings ratio. EV/EBITDA has become a mainstream tool for financial analysis.
Will almost always be higher
It’s particularly popular for viewing a email list company through the lens of being an acquisition target. Private equity. after all. has access to funding and thus wants to know how much money a company could make without worrying about interest and non-cash expenses. since much of those figures are subject to being rework when a company changes hands and takes on a new capital structure. EV/EBITDA is also highly useful for analyzing different firms within the same industry that use a different capital structure. For example. if one retail chain owns all their stores . excluding the depreciation of store buildings could give investors a fairer comparison of their underlying economics.
While the other leases them
A major issue with the EV/EBITDA ratio Latest Bulk SMS is that the costs exclud in an EBITDA calculation are. in fact. real expenses. Taxes and interest have to be paid. and depreciation is an actual expense as well. A firm that skimps on repairing its hard assets such as vehicles or buildings will likely fail to remain competitive against peers over the long haul. All that to say that while EV/EBITDA is a useful contextual framework. it’s hardly a be-all and end-all calculation on its own. at least for equity investors. EBITDA was creat with an eye toward how much leverage a business could maintain — specifically. how much interest a company could afford to pay for given its current cash flows. This is highly useful information from a lender or private equity investor’s standpoint. but could lead to incomplete or errant conclusions for common shareholders.