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Enterprise Value Multiples Formulas and Examples

The enterprise value multiples formulas are some of the valuation multiples in finance. They are often used in the valuation analysis of a company to determine whether the shares are over or undervalued. They are some of the most accurate methods of analyzing a company and determining the value of the shares in order to make informed business decisions as a business person or an investor.

It is also possible to use the price-to-earnings ratio to determine whether a company is fairly valued, undervalued, or overvalued but a lot of investors and market analysts prefer the EV multiples. This is because they believe the Enterprise value multiples are more comprehensive ratios. They provide more reliable values than the PE ratio does at least in the mind of the investors who prefer to use the EV multiples.

Keep in mind that whether or not the EV multiples are better than the PE ratio is purely based on preferences and not based on actual facts. Therefore it is not generally accepted that the EV multiples are better than the PE ratio.

So in this article, we would take a look at the different enterprise value multiples, their formulas, calculation examples, and how the results can be interpreted.

First of all, let’s take a look at what enterprise value is before we take a look at some of its multiples.

This can be seen as the measure of a company’s total value. It takes into account, all the important elements of a company such as the company’s earnings, debt, market capitalization, cash, and cash equivalents. These are the elements that make up the formula for calculating a company’s enterprise value. Now, the question is “how is enterprise value calculated?”

Enterprise value formula

The enterprise value of a company is calculated by adding the market capitalization (market cap) to the company’s total debt and then subtracting the cash and cash equivalents from that value. This is expressed in the enterprise value formula as; EV= Market cap (mc)+ Net debt – Cash and cash equivalents

Parameters of the enterprise value formula

Market cap

This is also known as market capitalization. The market cap represents the value of a company according to the stock market (market value) based on the company’s outstanding shares. These outstanding shares are those shares of a company that are traded on the stock market and can be bought by the public.

Market cap can be calculated by multiplying the price of one share by the total number of outstanding shares. For example, a company that has fourteen million (14 million) outstanding shares each sold at ten dollars ($10) would have a market cap of one hundred and forty million dollars ($140 million).

Net debt

This is simply the total amount of debt a company has. It can be calculated by summing up the company’s long and short-term debt which can be found on the company’s balance sheet under its liabilities.

Cash and cash equivalents

Cash and cash equivalents are simply a sum of the company’s liquid assets. A liquid asset is an asset a company possesses that can be sold quickly and easily thereby converting it into cash. These assets generally maintain their market value which means that when they are sold, the seller would get a good price for them and not be at a loss. Some examples of liquid assets are stocks, bonds, or mutual funds. The cash and cash equivalents which are part of a company’s tangible assets as well as intangible assets can be found on a company’s balance sheet.

An image showing the tangible and intangible assets on a company's balance sheet
An image showing the tangible and intangible assets on a company’s balance sheet

The types of enterprise value multiple

  1. Enterprise value/Revenue (EV/Revenue)
  2. Enterprise value/Earnings before interest, tax, depreciation, amortization, and rental or restructuring costs (EV/EBITDAR)
  3. Enterprise Value/Earnings before interest, tax, depreciation, and amortization (EV/EBITDA)
  4. Enterprise value/Invested capital (EV/Invested capital)

The above are the types of enterprise value multiples. Similar to the price-to-earnings ratio, when the enterprise value multiples are calculated, the result can be used in evaluating a company. The value gotten after the calculation can be used either in a comparable company (comps) analysis or a precedent merger and acquisition (M&A) analysis.

The comps analysis compares your result with that of other companies in the same industry while the precedent M&A analysis uses companies that have been recently sold in comparison with the companies in the same industry. These comparisons are done in order to confirm whether the company is truly fairly, over, or undervalued. Once the comparison is completed, an investor can then ascertain whether a company’s shares are worth buying or not.

Enterprise value/revenue (EV/revenue)

In cases where investors need to value a company that they potentially want to acquire, they use the EV/revenue multiple. The enterprise value/revenue multiple also known as enterprise value to sales ratio can be defined as a revenue multiple that measures a company’s stock value by comparing the company’s enterprise value to its annual revenue.

The EV/revenue multiple helps investors understand whether a company’s shares are fairly, over, or undervalued. The lower the EV/revenue multiple, the better for investors because it suggests to them that the company’s shares are undervalued. This attracts investors who are generally looking to buy shares at a lower price and later resell them at a higher price.

Enterprise value/revenue formula

Enterprise value multiples formula. An image showing the EV/Revenue formula
This image shows the formula for calculating the enterprise value/revenue.

One of the enterprise value multiples formulas is the EV/revenue formula. The EV/R formula is a ratio that divides a company’s enterprise value by its annual revenue. As with the other EV multiples, It is a useful tool for valuing a business. It is expressed as EV/R = Enterprise value/Annual revenue

Defining the EV/R formula parameters

Enterprise value

EV Has already been defined earlier, however as a quick recap, it is simply a way of measuring a company’s total value. This is done by summing the company’s market cap and its total debt and then subtracting the cash and cash equivalents from it.

Annual revenue

This is the total revenue that a company generates. It is usually earnings from sales of goods or services as well as the capital and any other assets of the company within a given year. The annual revenue does not take into account any costs or expenses that the company incurs. Calculating the annual revenue helps the company know how well they’ve done compared to the past year, years, or even their competitors. It is calculated by simply summing up all the income realized within the year under consideration.

Example and Calculation

Assuming a manufacturing company has an annual revenue of $3,000,000 total debt of $50,000 cash and cash equivalents of $6,000 and a market cap of $5,000,000. Its enterprise value/revenue can be calculated using EV/R = Enterprise value/Annual revenue

Annual revenue = $3,000,000

Enterprise value = Market cap + net debt – cash and cash equivalents = [($5,000,000 + $50,000) – $6,000] = $5,044,000.

Now we would divide the enterprise value by the annual revenue to get the EV/R.

EV/R = 5,044,000 ÷ 3,000,000

EV/R = 1.68

This means that the manufacturing company has an enterprise value/revenue ratio of 1.68 When this figure is compared to that of other companies in the manufacturing industry, then it may be interpreted as either a high or low EV/R ratio.

Enterprise Value/Earnings Before Interest, Tax, Depreciation, Amortization, and Rental or restructuring costs (EV/EBITDAR)

EV/EBITDAR is a ratio that compares a company’s enterprise value to its earnings before interests, taxes, depreciation, amortization, and rental or restructuring costs (EBITDAR). It is used to evaluate firms that are undergoing restructuring or paying rent. It is mostly used by retail companies as a means of understanding their financial performance and can also be useful to investors who want to buy into such companies.

EV/EBITDAR formula

Enterprise value multiples formula. An image showing the EV/EBITDAR formula
This image shows the formula for calculating enterprise value/EBITDAR

The enterprise value/earnings before interest, taxes, depreciation, and restructuring or rental costs is one of the enterprise value multiples formulas useful in analyzing the profitability of different retail companies especially outlets owned by the same company in different locations.

The formula can be expressed as; EV/EBITDAR = Enterprise value/Earnings before interest, tax, depreciation, amortization, and rental or restructuring cost

Defining the EV/EBITDAR parameters

Enterprise value

As earlier defined, it is a metric for measuring a company’s total value. This is done by summing the company’s market cap and its total debt and then subtracting the cash and cash equivalents from it.

EBITDAR

Earnings before interest, tax, depreciation, amortization, and rental or restructuring costs is a financial metric that is used to analyze a company’s financial performance. It is used to analyze companies that have significant rental or restructuring costs such as restaurant franchises, bars, casinos, hospitals, wholesale traders, and airline companies. It is a variant of EBITDA because it has all its elements but considers the occasional expenses that arise when a company is restructuring or paying rent. Hence, EBITDAR takes the cost of restructuring or rent into consideration.

EBITDAR enables companies with high operating expenses or those undergoing a restructuring to access their financial performance with utmost accuracy. It is calculated by adding up all the values of a company’s earnings before interest, tax, depreciation, amortization, and restructuring or rental costs.

Earnings before interest is the same as net income, this is the total income a business has before paying interests on either long-term or short-term loans or other interest payments.

Tax includes all tax payments made by the business such as income, employment, excise, security, etc.

Depreciation is the amount a business deducts for the cost of purchasing and using the tangible assets they own.

Amortization is the amount a business deducts for the cost of purchasing and using the intangible assets they own.

Restructuring or rental costs are the expenses the business incurs when it is undergoing restructuring or paying rent.

EV/EBITDAR formula and calculation

Suppose a bar has a net debt of $1,800,000 a cash balance of $500,000 and a market capitalization of $10,000,000 and has the following additional information

Net income Interest Taxes Depreciation AmortizationRent
$5,000,000$1,000,000$200,000$59,000$15,000$350,000
A table showing the parameters of EBITDAR and their accompanying amount.

We can calculate the bar’s EV/EBITDAR using the formula EV/EBITDAR = Enterprise value/Earnings before interest, tax, depreciation, amortization, and rental or restructuring cost

Enterprise value = Market cap + net debt – cash and cash equivalents = [($10,000,000 + $1,800,000) – $500,000] = $11,300,000

EBITDAR = Net income + Interest +Taxes + Depreciation + Amortization + Rent = $5,000,000 + $1,000,000 + $200,000 + $59,000 + $15,000 + $350,000 = $6,624,000

We can now input the figures into the formula and calculate the EV/EBITDAR

EV/EBITDAR = $11,300,000 ÷ $6,624,000

EV/EBITDAR = 1.71

This means that the bar has an enterprise value/earnings before interest, tax, depreciation, amortization, and rental or restructuring cost ratio of 1.71 When this figure is compared to that of other bars within the same location, then it may be interpreted as either a high or low EV/EBITDAR ratio

Enterprise Value/Earnings before interest, tax, depreciation, and amortization (EV/EBITDA)

Enterprise value/Earnings before interest, tax, depreciation, and amortization (EV/EBITDA) is another enterprise value multiple used in business valuation. It is useful to business owners, analysts, and investors alike as it gives a hint about the financial standing of the business. Unlike EV/EBITDAR it does not take the cost of restructuring or renting into consideration as it is used by businesses that own their building or have not done any restructuring in the year under review.

EV/EBITDA formula

Enterprise value multiples formula. An image showing the EV/EBITDA formula
This image shows the enterprise value/EBITDA formula

The Enterprise value/Earnings before interest, tax, depreciation, and amortization formula is one of the enterprise value multiples formulas, it is expressed as EV/EBITDA = Enterprise value/Earnings before interest, tax, depreciation, and amortization.

Defining the EV/EBITDA formula parameters
Enterprise value

This is simply a way of measuring a company’s total value. This is done by summing the company’s market cap and its total debt and then subtracting the cash and cash equivalents from it.

EBITDA

Earnings before interest, tax, depreciation, and amortization is a financial metric that aids business owners and investors to know the value of a business as well as its financial performance. It gives insight into the operational decisions of a company and how it generates income by adding up all the values of a company’s earnings before interest, tax, depreciation, and amortization.

Earning before interest is the same as net income, this is the total income a business has before paying interests on either long-term or short-term loans or other interest payments.

Tax includes all tax payments made by the business such as income, employment, excise, security, etc.

Depreciation is the amount a business deducts for the cost of purchasing and using the tangible assets they own.

Amortization is the amount a business deducts for the cost of purchasing and using the intangible assets they own.

EV/EBITDA calculation

Consider the following information for a recycling company

Item Amount
Net income$40,000,000
Market cap$500,000,000
Depreciation$20,000,000
Interest expense$10,000,000
Net debt$60,000,000
Cash balance$15,000,000
Amortization$5,000,000
Taxes$10,000,000
A table showing the parameters of EV/EBITDA and their accompanying amount.

Using the above information, we can calculate the EV/EBITDA after finding the enterprise value and EBITDA.

Enterprise value = Market cap + Net debt – Cash balance = [($500,000,000 + $60,000,000) – $15,000,000] = $545,000,000

EBITDA = Net income + Interest +Taxes + Depreciation + Amortization = $40,000,000 + $10,000,000 + $10,000,000 + $20,000,000 + $5,000,000 = $75,000,000

We can now use EV/EBITDA = Enterprise value/Earnings before interest, tax, depreciation, and amortization.

EV/EBITDA = $545,000,000 ÷ $75,000,000

EV/EBITDA = 7.27

This means that the recycling company has an enterprise value/earnings before interest, tax, depreciation, and amortization ratio of 7.27

Enterprise value/Invested capital (EV/Invested capital)

The EV/invested capital is another financial metric that is used in valuing an enterprise. It is commonly used by businesses whose earnings and revenue are driven by their capital assets. Just like the other enterprise value multiples, it can tell an investor whether a company is fairly valued, undervalued, or overvalued.

Enterprise value/Invested capital formula

Enterprise value multiples formula. An image showing the enterprise value/invested capital formula
This image shows the enterprise value/invested capital formula

One of the enterprise value multiples formulas is the EV/Invested capital formula. This formula is a ratio that divides a company’s enterprise value by its invested capital. It is expressed as EV/Invested capital = Enterprise value/Invested capital

Defining the enterprise value/Invested capital parameters

Enterprise value

As earlier defined, it is a metric for measuring a company’s total value. This is done by summing the company’s market cap and its total debt and then subtracting the cash and cash equivalents from it.

Invested capital

This is the total amount that has been invested in an enterprise. It is a sum of the total equity and total debt of the company. The total equity in this case is all capital gotten through shares while total debt is all capital gotten from notes or bonds as well as all other lending sources.

Enterprise value/Invested capital calculation

Suppose a mobile phone manufacturing company has a market capitalization of $100,000,000 total debt of $3,000,000 cash equivalents of $960,000 and total equity of $5,000,000. Its enterprise value/invested capital can be calculated using EV/Invested capital = Enterprise value/Invested capital

Enterprise value = Market capitalization + Net debt – Cash and cash equivalents =[($100,000,000 + $3,000,000) – $960,000 = $102,040,000

Invested capital = Total equity + Total debt = $5,000,000 + $3,000,000 = $8,000,000

EV/Invested capital = $102,040,000 ÷ $8,000,000

EV/Invested capital = $12.76

This means that the mobile phone manufacturing company has an enterprise value/earnings before interest, tax, depreciation, and amortization ratio of 12.76

Interpretation of enterprise value multiple

As earlier stated, the enterprise value multiples are useful financial metrics for valuing a business and also tell investors if a company is fairly valued, undervalued, or overvalued as they involve key data of the business. Usually, before an acquisition or merger, these multiples are used because they effectively cancel out the effect debt financing has on the other valuation ratios used.

EV multiples aid analysts to make sound estimates when they are properly used in business valuation because they are relatively easy to use.

Generally, companies with a high growth rate have a high EV multiple whereas slow growth or matured companies have a low EV multiple. However, one can only ascertain if a value is high or low when it is compared with that of other companies within the same industry.

Challenges when using EV multiple

  1. The enterprise value multiples are most effective in comparing companies within the same sector. it cannot be used to compare companies in different sectors as their incomes and expenditures are likely to differ thereby making different sectors have different EV multiples.
  2. The simplicity of the EV multiples could lead to misrepresentation of data. For example, a company that is not doing well financially could be mistaken for a matured company when only its EV multiple is considered.
  3. The EV multiples are more effective as a tool for short-term appraisal of a company rather than for long-term appraisals because they mostly consider just annual data in their calculation.

FAQs

What does a low EV multiple mean?

Generally, slow growth or matured companies have a low EV multiple. However, one can only ascertain if a value is high or low when it is compared with that of other companies within the same industry.

What does a high EV mean?

Generally, companies with a high growth rate have a high EV multiple however, one can only ascertain if a value is high or low when it is compared with that of other companies within the same industry.

What is the formula for calculating enterprise value/revenue?

EV/R = Enterprise value/Annual revenue
where
Enterprise value = Market capitalization + Net debt – Cash and cash equivalents.

What is the formula for enterprise value/EBITDAR?

EV/EBITDAR = Enterprise value/Earnings before interests, taxes, depreciation, amortization, and restructuring or rental costs.
where
Enterprise value = Market capitalization + Net debt – Cash and cash equivalents.
EBITDAR = Net income + Interest +Taxes + Depreciation + Amortization + Rent.

What is the formula for calculating enterprise value/EBITDA

EV/EBITDA = Enterprise value/Earnings before interest, tax, depreciation, and amortization (EV/EBITDA)
where
Enterprise value = Market capitalization + Net debt – Cash and cash equivalents.
EBITDA = Net income + Interest +Taxes + Depreciation + Amortization

What is the formula for enterprise value/Invested capital?

EV/Invested capital = Enterprise value/Invested capital
where
Enterprise value = Market capitalization + Net debt – Cash and cash equivalents.
Invested capital = Total equity + Total debt
Last Updated on November 6, 2023 by Nansel Nanzip Bongdap