EV to EBITDA Valuation | Calculate EV/EBTIDA Multiple - YouTube

hello everyone hi welcome to the channel of Wallstreetmojo friends we are going

to learn a tutorial on earning enterprise value to EBITDA multiple so in case

we are in this case you are going to learn a formula and why it is much more

better than the price to earnings ratio so the first hand first thing earning

value is basically enterprise value while EBITDA is earning before

interest tax depreciation and amortization

and this the value of EV to EBITDA are use in order to find the EV to EBITDA

ratio of an organization and this metric is widely used to analyze and and

measure and organizations are why that is a return on investment as well as its

value there is a example or a graph that I have taken that is the enterprise

value to EBITDA of Amazon and Walmart the enterprise value as you can see in

this particular graph we note that the EV to EBITDA of Amazon is close

enough to 29.6 while whereas the EV to EBITDA for Walmart is close enough to

7.6 does this mean that Walmart is trading cheap or and we should buy

Walmart compared to Amazon so in this detail tutorial on EV to EBITDA ratio we

are going to discuss many things and let's get into the nitty-gritty of the

same the first in the first and the foremost thing

what is the enterprise value the numerator see enterprise value shows the

company's total valuation and EV is used as a better alternative to the

market capitalization the value that is calculated as enterprise value is better

considered and is considered better than the market capitulation because it is

calculated by adding more vital components to the value of the market

capitalization the added components to enterprise value calculation is

preferred interest then you have minority interest the total

and cash equivalents the value of that minority interest and the preferred

interest are added with the calculated calculation of the market capitalization

when you add this you get your what your enterprise value and we can does write a

basic formula of enterprise value is EV is equal to your market cap plus

the minority interest plus the preference shares you have to deduct

from this the cash that will give you your enterprise value so theoretically

the calculated enterprise value can be considered as the price or value at

which the company is bought by an investor so in such a case the buyer

will have to take up the debt of the organization too as is the responsibility

in other words it is said that the particular value will be pocketed by him

to the inclusion over here in case of this that is the debt over here in this

which gives the enterprise value its added advantage for the purpose of

organizations value representation this is because the debt is to be considered

seriously and when it comes to any takeover situation for example it will

be more profitable to acquire an organization with a market

capitalization of close enough to 10 million with no debt then acquiring an

organization with the same market capitalization and a debt of having 5

million okay apart from the debt the enterprise value

calculated also include other special components which are important in

arriving at an accurate figure of the forms value let's understand the next

thing that is the EBITDA portion so when we talk about EBITDA on or

earning before interest tax depreciation and amortization it is basically a

measured representation of the organization financial performance so

with the help of the this we can find out the potential of a particular firm

in terms of the profits and its operation can what operations it can

make so we can write the formula of a EBITDA is is is equal to your operating

profit okay your operating profit plus any non-cash expenditure like depth or

amortization so that will give you your EBITDA now here the operating profit is

equal to the net profit that is the interest

taxes added together so the depreciation expense in amortization expense play a

major role in EBITDA calculation so in order to understand about the EBITDA to

the forest the two terms that have been explained is depreciation and

amortization so depreciation is basically an accounting technique for

allocating the cost of the tangible assets over the useful life so

businesses depreciate the long term assets for both tax and accounting

purposes for tax purposes the business deduct the cost of tangible assets that

is the cost of you can say fixed assets and they purchase as a business expense

but business should depreciate this assets in accordance with the standards

rules regarding how when the deduction could be made in case of the

amortization, amortization can be can be explained as the paying of the

debt with the fixed repayment schedules or installments over the particular

amount of time so two common example of this are mortgage

okay and you have automobile loans so in additionally refers to the spreading of

the capital capital expenses for intangible assets or a particular period

of time again for accounting and tax purposes

so EBITDA is actually you can say net income with interest tax depreciation

amortization further added back to it so EBITDA may be employed to analyze

the compare the profitability of different organization and industries as

it eliminates the effects of financing and accounting decisions EBITDA

commonly utilized in valuation ratio in valuation ratios compared to the

enterprise worth and revenue so EBITDA is basically you can say a non-gaap

measure okay and as reported and use internally to measure the performance of

the company now let's see basically some of the details regarding EV to EBITDA

ratio or the enterprise multiple so now basically that we have we know that

about EV and EBITDA so we have we can look at how they are used to get the EV

to EBITDA ratio or in other words Enterprise multiple okay so the EV to

EBITDA ratio looks at the firm as the potential acquirer okay and

taking into consideration the company's debt which is which alternative

multiples like price to earnings ratio that is the p/e ratio does not embarrass

Empress so this can be calculated with the help of the enterprise value formula

so the enterprise value formula is going to be is equal to your enterprise value

EV divided by EBITDA okay so now next let's consider the consideration

regarding EV to EBITDA forward versus trailing see EV to EBITDA can be

further be divided into in investment banking analysis as training and forward

so I'm just writing over your EV to EBITDA and it has two things that is

first is trailing and second is forward

so in case of trailing trailing EV to EBITDA formula that is TTM or trailing

12 months is equal to your enterprise value divided by the EBITDA over the

previous 12 months over the previous 12 months but in case of forward trailing

PV likewise the forward EV to EBITDA formula it is for the next 12 months got

it so that's the difference the key difference here is the EBITDA

denominator that is the we use historical EBITDA in EV to EBITDA in trailing

EV to EBITDA and we use forward or EBITDA forecast focused in the forward EV to EBITDA

let's look at the example of Amazon see Amazon's trailing every EV to EBITDA

is close enough to 29.58 X and the forward is

22.76 X let's see the chart of EV to EBITDA of Amazon

can you see over here the Amazon to EV to EBITDA is close enough to

29.58 and the forward one is 22.76

so now let's see how the EBIT two calculation of EV to EBITDA has been

done now let's see let's take an example over here from the above table and learn

how this is calculated see there are ratings over here the price shares in

all details given EV TTM is given EBITDA TTM

and EV to EBITDA TTM details are given so the enterprise value formula is

what market cap plus debt - cash and the market capitalization is

price into number of shares so in case of triple BBB over here it is going to be

7 is the price and into your number of shares that will give you a market

cap enterprise value is 350 + 400 - the cash that is 100 so that will

give you your 650 as your enterprise value the trailing 12-month EBITDA of

BBB is close enough to as you can see over here it is 30 right so EV to

EBITDA TTM is going to be 650/30 which gives you 21.7x

likewise if we want to find EV to EBITDA for of BBB forward we just

need to divide the forward data that is over here in case of forward data is 33

so 650 divided by 33 that gives you 19.7 X now basically over here some of the

points that has to be considered with respect to trailing was as forward EV to

EBITDA is that if in this scenario if the EBITDA is expected to grow then then the

forward to then the forward EV to EBITDA will be lower than the historical or

trailing EV to EBITDA from the above table that we just saw the AAA and

BBB shown an increase in the EBITDA hence their forward EV to EBITDA are

lower than the trailing EV to then the trailing price to earning on the other hand

if the EBITDA expected to decrease then you will note that the forward EV to EBITDA

will be higher than the trailing to EV to EBITDA this can be observed in in

our table in company DDD let me show you can you see over here DDD

which is standing at 21 X right so however you know if you see the forward

EV to EBITDA increased to 26.3 and then 35 X in 2017 and

2018 respectively so one should not only compare the trailing EV to EBITDA of

evaluation comparison between the two companies but also look at the forward

EV to EBITDA to focus on the relative value

whether the EV to EBITDA difference reflects the company's long-term growth

prospect and financial stability or not now how to find the target price using

EV to EBITDA ratio so what so what is exactly the significance of the

enterprise multiple see investor primarily invest in using primary uses

an organization's EV to EBITDA ratio in order to determine whether the

company is undervalued or overvalued so a basically a low EV to EBITDA value

indicates that the particular organization may well be undervalued and

high EV to EBITDA ratio well indicates that the organization may

be overvalued so an EV to EBITDA ratio is beneficial for transactional

comparison transactional comparison because that ignores the distorting

effects of the individual countries taxation policies it is also employed to

find out the attractive takeover candidates in enterprise value also

includes debt basically enterprise value also considered debt and is thus a much

better metric than the market cap for mergers and acquisition an organization

with low EV to EBITDA ratio will be viewed as decent takeover candidate now

which sectors are best suited for valuation using EV to EBITDA so there

are sectors like oil and gas automobile for then we have a cement sector we have

steel sector and energy sector too that is steel sector and energy sector

so however EV to EBITDA can not be used when the current cash flow is

negative so this is one backdrop over here there are some limitations to EV to EBITDA

is that you know EBITDA is actually non-gaap EBITDA is basically

a non-gaap measure because that allows a large amount of discretion on what is

and what is not added with the calculation because this also implies

that organization is usually modify the things included in the EBITDA

calculation from one reporting period to another see EBITDA initially came into

common use with leveraged buyout which is known as LBO, LBO okay in the 80s

and at that time it had employed to indicate the ability of an organization

to serviced it so as time passed it be

widespread industry with expensive asset that had to be written down over the

long period of time see EBITDA that is currently commonly coated by these

several firms particularly within the tech sector but with these several firms

- and even when it is not secured so on the very final conclusion end you can

say EV to EBITDA ratio is really very important and it is widely used

metric to analyze company's total value this metric has been successfully in

solving the problems encountered while using the traditional metric like p/e

ratio and hence it is preferred over them also as this ratio is basically a

capital you can say capital structure neutral and it can be effectively used

to compare organization but different ranges of leverage which was not

possible in the case of this simpler ratio thank you everyone