Ten Stock Analysis Ratios Used By The Pros: Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortisation
Tenth Key Ratio :
Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortisation
Just as the Enterprise Value is a better indication of a business’ true value if it were to be bought, the EV/EBITA is seen as more useful method of valuation than Price/Earnings in the case of an acquisition. As EBITDA focuses on the operating cash flows and leaves out the impact of depreciating assets, interest paid on debt and taxation thus EV/EBITDA provides a valuation that is useful for a potential acquirer. A low EV/EBITDA will highlight a strong target for an acquirer.