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Enterprise value and EV/EBITDA

Enterprise value is equity plus interest-bearing debt minus surplus cash. It is the value of the operations, before asking who funded them. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, enterprise value is $130,000,000. Against $10,000,000 of EBITDA that is 13 times.

Enterprise value

$130,000,000

13.00 times EBITDA

Equity
$100,000,000
Debt
$40,000,000
Cash
$10,000,000
Net debt
$30,000,000
Enterprise value
$130,000,000
EV / EBITDA
13.00x
$

Figures on this page are in millions of dollars.

$
$
$

Optional. When this is above zero, the multiple is enterprise value over EBITDA.

The formula

EV=E+D−CEV = E + D - C

EE is the value of the equity, DD interest-bearing debt, and CC surplus cash. Net debt is D−CD - C, so EV=E+net debtEV = E + \text{net debt}. The multiple is EVEV divided by EBITDA when EBITDA is positive.

What the identity is adding

Equity is the residual claim. Debt is a fixed claim on the same operations. Cash you could hand back without breaking the operations is not part of those operations, so it comes off. Add the two claims, subtract the surplus cash, and what remains is the value of the firm as a going set of assets: enterprise value.

On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000 and enterprise value is $130,000,000. A buyer of the whole firm pays the equity holders, takes on the debt, and inherits the cash. The cheque that prices the operations is the $130,000,000, not the $100,000,000.

The DCF calculator produces this same object from the other side: discounted free cash flow to the firm. A DCF that was built on unlevered cash flows should be compared with enterprise value, not with equity value. Mixing the two is how a model quietly prices the debt twice.

Cash is not always surplus

The identity subtracts cash because the usual teaching sheet treats cash as surplus: money that could be taken out tomorrow without changing the forecast. Operating cash that has to sit in the business is not surplus. Subtracting it anyway understates enterprise value.

Zero out the cash on the first sheet and enterprise value becomes $140,000,000, which is equity plus debt with nothing handed back. Net debt is then the full $40,000,000. That is the right move when the cash line is working capital, not a pile.

EBITDA sits underneath as a flow, not a stock. It is not cash, and it is not free cash flow. It is a convenient (and abused) denominator for a multiple once you already have an enterprise value.

The multiple is a ratio, not a price

EV/EBITDA is enterprise value divided by EBITDA. On the first sheet, $130,000,000 over $10,000,000 is 13. Raise EBITDA to $13,000,000 and the same enterprise value is 10 times. The identity did not move. The denominator did.

A multiple is how a set of comps is quoted. It is not a substitute for a discounted cash flow. Two firms can print the same 13 times for reasons that have nothing to do with being the same business: different capex, different tax, different growth sitting past the EBITDA line. Read the multiple as a translation of this sheet into a ratio, then go back to the cash flows.

Equity value over net income is a different ratio on a different claim. Do not line EV/EBITDA up next to a P/E and call the gap a finding. One has debt in the numerator and a pre-interest denominator. The other does not.

What this page is not doing

It is not a full net-debt build. Leases, preferred stock, non-controlling interests and underfunded pensions often sit in a deal model's enterprise-value bridge, and none of them are sliders here. The identity on this page is the three-line version: equity, interest-bearing debt, surplus cash.

It is also not a recommendation about what multiple a firm should trade on. The 13 times on the teaching sheet is $130,000,000 over $10,000,000, nothing more. For how the operations themselves are discounted, use the DCF page. For how much of the sheet is borrowed, use the leverage ratio calculator. This is educational material, not financial advice.

Worked examples

Equity, debt and cash on one sheet

Equity is $100,000,000, interest-bearing debt is $40,000,000, surplus cash is $10,000,000, and EBITDA is $10,000,000. What is enterprise value, and what is EV/EBITDA?

  1. Net debt is debt minus cash: 40000000−10000000=3000000040000000 - 10000000 = 30000000, so $30,000,000.
  2. Enterprise value is equity plus net debt: 100000000+30000000=130000000100000000 + 30000000 = 130000000, so $130,000,000.
  3. The same figure the other way: equity plus debt minus cash, 100000000+40000000−10000000100000000 + 40000000 - 10000000.
  4. EV/EBITDA is 130000000/10000000=13130000000 / 10000000 = 13.

Enterprise value is $130,000,000. Net debt is $30,000,000. EV/EBITDA is 13 times.

The same sheet with no surplus cash

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Cash is now $0. What is enterprise value?

  1. Net debt is the full $40,000,000, because nothing is subtracted.
  2. Enterprise value is 100000000+40000000=140000000100000000 + 40000000 = 140000000, so $140,000,000.
  3. EV/EBITDA is 140000000/10000000=14140000000 / 10000000 = 14.

Enterprise value is $140,000,000, and the multiple is 14 times. The $10,000,000 of cash on the first sheet had been worth exactly that much of EV.

The same EV against a higher EBITDA

Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so enterprise value is still $130,000,000. EBITDA is now $13,000,000. What is the multiple?

  1. Enterprise value does not move: it is a stock identity, not a flow. It stays $130,000,000.
  2. EV/EBITDA is 130000000/13000000=10130000000 / 13000000 = 10.

The multiple is 10 times. Enterprise value is still $130,000,000. The identity did not change; the denominator did.

The mistake that costs the most

Comparing a DCF of unlevered cash flows with equity value, or lining EV/EBITDA up next to a P/E.

Unlevered cash flow is a claim on the operations. The number it discounts to is enterprise value. Equity value is what is left after net debt. Treating $130,000,000 of discounted operations as what the shares are worth double-counts the $30,000,000 of net debt, or ignores it, depending on which way you drifted.

P/E uses equity in the numerator and a post-interest profit in the denominator. EV/EBITDA uses operations in the numerator and a pre-interest, pre-tax flow in the denominator. A gap between 13 times and a P/E is not a trading signal. It is two different fractions.

Common questions

Is this book equity or market equity?

Whichever you type. A deal model usually wants the market value of the shares. A classroom balance-sheet identity often uses book equity. The formula does not know the difference. Say which one you used before you compare two firms.

Where do leases and preferred stock go?

In a full bridge, often into net debt or as separate claims above equity. This page is the three-line identity: equity, interest-bearing debt, surplus cash. Adding a lease liability raises enterprise value the same way adding a loan does.

Why subtract cash?

Because surplus cash is not an operating asset on the usual teaching sheet. A buyer who pays equity value receives the cash, so the price of the operations is equity plus debt minus that cash. If the cash cannot be taken out, do not subtract it. The second worked example is that case.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.