EV/EBITDA and EV/Sales

Enterprise value (EV) measures the value of a whole business, including both its equity and its debt, minus its cash. EV multiples compare that total value with measures that belong to all capital providers, such as EBITDA, EBIT or revenue. EV/EBITDA is the favourite multiple in mergers, private equity and many sell side reports because it allows comparisons between companies with different amounts of debt. EV/Sales is used when companies have little or no profit.

Calculating enterprise value#

enterprise value = market cap + total debt + preferred stock + minority interests - cash and equivalents

Think of EV as the price to buy the whole company: you pay the shareholders (market cap), take on the debt, and keep the cash.

The main EV multiples#

Why use EV instead of market cap?#

• Debt matters: P/E ignores debt, so heavily indebted companies can look cheap. EV includes it.
• Matching numerator and denominator: EBITDA and revenue belong to both lenders and shareholders, so they should be compared with EV, which also covers both.
• Acquisition logic: an acquirer must pay off or assume the debt.

Typical ranges#

EV/EBITDA multiples vary by industry and time. Mature, slow growing businesses often trade around 6x to 10x; high growth software and quality consumer brands can trade at 20x or more. Utilities and telecoms with steady cash flows often sit in between. Compare with peers and history. See Comparable Companies and Precedent Transactions.

EV/Sales#

EV/Sales = enterprise value / annual revenue

EV/Sales is useful for companies that are not yet profitable, but it ignores profitability. A company with 80% gross margins deserves a much higher EV/Sales than one with 20% margins. Some analysts adjust for growth and margins, such as the "rule of 40" for software, which adds revenue growth and profit margin. See Unit Economics.

Limits#

• EBITDA's flaws: it ignores capex, working capital, taxes and interest. See Operating Income, EBIT and EBITDA.
• Leases and pensions: treatment varies and can distort EV.
• Adjusted EBITDA: companies define it differently.
• Cash may be trapped overseas or needed for operations.
• Financial companies: EV multiples do not work well for banks and insurers, whose debt is part of their business.

Frequently asked questions#

What is enterprise value?#

The total value of a business: market capitalisation plus debt and other claims, minus cash.

Why is EV/EBITDA used instead of P/E?#

Because it accounts for debt and compares companies regardless of capital structure, tax rates and depreciation policies.

When should I use EV/Sales?#

For companies with little or no profit, while adjusting for differences in margins and growth.

Next, learn price based multiples in Price to Sales and Price to Book.