EBITDA ratio explained

EV/EBITDA ratio is the Enterprice Multiple: A ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several reasons:1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies.2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with a low enterprise multiple can be viewed as a good takeover candidate.Keep in mind that enterprise multiples can vary depending on the industry.

Therefore, it's important to compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in high growth industries (like biotech) and lower multiples in industries with slow growth (like railways). P/E is the Price to Earnings Ratio, also known as the price multiplier: It is a valuation ratio of a company's current share price compared to its per-share earnings. Its formula is:Market Value Per Share/Earnings Per Share (EPS)It basically tells you how much an investor is willing to pay for a dollar of earnings. For example, if a companyés shares are traded at $25 and its last 4 quarters earnings per share was $2, then the P/E ratio is = $12.In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.