Enterprise value is measured as:
Enterprise value = Market value of common equity + Market value of preferred stock + Market value of debt – Cash and investments
EV/EBITDA is one of the most widely used enterprise value multiples. It is the ratio of the total company value to EBITDA. The rationales for using EV/EBITDA are as follows:
The drawbacks for using EV/EBITDA are as follows:
Other income measures used instead of EBITDA includes EBIT, EBITA, and FCFF.
EV/EBITDA is positively related to the expected growth rate in FCFF, profitability and negatively related to the firm’s weighted average cost of capital.