Skip to main content

Translate

EV/EBITDA and It’s analysis

Introduction:-

Just like the PEratio (price to earning), the EV/EBITDA is very famous for the valuation of the company. EV stands for enterprise value and EBITDA stand for Earnings before interest, tax, depreciation and amortization (EBITDA). And it compares company on very different stages on the basis of the company’s earning. If it is rightly calculated then it reveals the secret that what is the current position of the company? Is company’s share is undervalued or overvalued?
Although the PE ratio typically used as the go-to-valuation tool, there are benefits of using the PEratio along with the EV/EBITDA. By using both ratios you get more accurate results about company’s current status.
Many investors look for companies that have low valuation by using PE and EV/EBITDA and solid dividend growth.
EV/EBITDA and It’s analysis
EV/EBITDA and It’s analysis

How to calculate?

The enterprise value to EBITDA ratio is calculated by:-
Ratio = EV/EBITDA
Where EV is the company’s enterprise value (EV) and calculated as follows-
EV = market capitalization + preferred shares + minority interest + debt – total cash
This metrics is used as a valuation tool to compare the value of a company. It’s ideal for analyst and investors to look and compare within the same industry for better understanding of this ratio.
Best if EV/EBITDA <10

How to use EV/EBITDA or using tips:-

  • Typically EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investor to determine companies with the healthiest EV/EBITDA within the specific sector.

Limits of EV/EBITDA:-

  • Never invest on sole basis of that ratio. Use it with other ratios like PE ratio, debt to equity and book to value etc.


Comments

Popular posts from this blog

My Investments and COVID-19

Everyone has witnessed huge market decline in the month of March when our PM Narendra Modi suddenly announced lockdown to tackle covid pandemic. Sensex stock market index reached all time high of 42273.87 in January of 2020 and from there it fallen down to below 26000 pts, nearly 40 % down. And from there it started healing. My Investments and COVID-19 Before this great fall my all investments were in undervalued stocks with very low P/E multiple, attractive earnings and exciting track record. Thanks to this quality stocks my own portfolio fall nearly 22 %. Although my 22% of capital vanished, I feel very delighted my portfolio beaten the market index(Sensex down nearly 40%) with significant points.  In the last year of your college generally you are not backed with huge capital support, and your capital is very limited. So securing capital is my first priority. Back on the track, I sold all the stocks with 22 % capital loss and secured rest of the principle capital

Why some investors give stocks so high PE?

PE ratio also known as Price to Earning ratio and the most popular ratio among the investors. They use this to identify undervalued or overvalued stocks.  we already covered what is PE ratio and how you can utilize this ratio, if you want to learn about this then simply click here . The very basic logic behind PE is, If earnings low then PE high and If earning high then PE low. In general parlance if stocks PE high then it considered as overvalued and if stock comes with low PE then it considered as undervalued. Generally people avoid investing in stocks with high PE but everything comes with exceptions.  Stocks with high PE means "people and investors are willing to pay high prices for low earning stocks". Why people or investor doing so ? there can be various reason behind this, after all its a stock market and everyone have their own perception. Reasons can vary person to person. There can be various reason for paying high PE stocks and one reason can be,  Investors are ve

Important ratios for stock analysis

Important ratios for stock analysis PE ratio:- PE ratio also known as the price to earning ratio and very famous between the investors. Investors use this ratio with other ratios or data to find out undervalued stocks. Read more Important ratios for stock analysis Earning per share:- In simple meaning it means “distribution of company’s profit between each shares” it can be used as the indicator for determining company’s profitability. It is best to use PE ratio and Earning per share comparatively. Return on Assets:- Is company using its assets effectively to generate income, yes or not? This ratio tells us the truth. This ratio gives us idea about management efficiency or capability to run company profitably. It compares company’s earnings as compare to its assets Dividend payout ratio:- It means “amount of dividends paid to stockholders relative to the amount of total net income of a company” Dividend payout ratio = Dividends / Net Income. Retention Ratio:- What c