EV to EBITDA = Enterprise Value (EV) / Earnings before interest, taxes, depreciation and amortisation (EBITDA).
It is the inverse of the EBITDA Yield ratio, which is calculated as EBITDA / EV.
Use it to implement the Acquirer’s Multiple investment strategy
You can use this ratio to implement the Acquirer’s Multiple investment strategy as explained in the excellent book by Tobias Carlisle called The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market.
What is The Acquirer’s Multiple?
The Acquirer’s Multiple is a valuation ratio that compares a company’s Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA) to its Enterprise Value.
It thus calculates the cost – EV - an outside investor would have to pay to acquire a company’s operating profits.
How you can use the ratio
Available as a screening ratio: YES
Available as an output column ratio: No (use EBITDA Yield)
How to select the lowest EV to EBITDA companies
To find companies with the lowest EV to EBITDA ratio set the slider from 0% to 10%.
If Enterprise Value is negative
If the Enterprise Value of a company is negative, a value of 1 is used for calculation purposes. For example if not the to EBITDA ratio would be a negative number.
We did this after the 2008 financial crisis. We were screening for deep value stocks at the time, and setting EV to 1 instead of NULL meant that securities with negative enterprise value would show up with extremely low ratios rather than disappeared from the screen.
The downside is that for companies with negative enterprise values you may for example see extremely low EV to EBITDA values.
The upside is that it makes it immediately obvious to you that you are looking at a negative Enterprise Value company.
This is exactly what you want as a deep value investor.
Click here to start using EBITDA to EV in your portfolio NOW!