understanding financial jargon
Enterprise Value to EBITDA Ratio (EV/EBITDA)
The ratio of Enterprise Value to Earnings Before Interest Tax Depreciation and Amortisation is a way of determining if the share price of a company is cheap relative to its peers or the wider market. It is similar to Price Earnings Ratio but modified to take account some of PER's weaknesses.
For example using the firms share price ignores debt, whereas using enterprise value includes debt. The EV value is then compared with earnings before, rather than after tax, interest depreciation and ammortisation.
This means that EV/EBITA measures the companies operating profitability (which it can control) but excludes those items such as tax, and arbitary accounting functions such as depreciation and ammortisation which don't affect the companies cash flow. As with all ratios it shouldn't be used in isolation. See also the Enterprise Value to EBIT Ratio, and Enterprise Value to EBITA Ratio.
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