Price to EBITDA

 

Price to EBITDA is the ratio of a company's stock price to its per-share Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA.'

Price to EBITDA is similar in concept to the Price to Earnings Ratio. It measure the amount you, as a shareholder, are paying for a given amount of earnings, and is therefore a measure of how "expensive" the stock is.

However, the P / EBITDA ratio, because it excludes Interest, Taxes, Depreciation and Amortization, can be a better way to compare the underlying businesses of companies with different amounts of debt, or which require big upfront capital investments. Some benefits of using EBITDA include:

  • For companies in industries which require big upfront investments or infrastructure (such as cable companies) and long gestation periods, EBITDA can be a more appropriate measure of the business's underlying profit potential since it excludes the cost of these investments.
  • EBITDA can indicate how attractive a leveraged buyout candidate the firm would be. In LBOs, the key factor is cash generated by the firm prior to discretionary expenditures, and EBITDA is the measure of cash flows from operations that can be used to support debt payment at least in the short term.
  • Looking at cashflows prior to capital expenditures may provide a better estimate of 'optimal value', as the capital expenditures may be unwise or earn substandard returns.
  • By looking at the value of the firm (inclusive of debt) and cashflows to the firm (prior to debt payments) it allows for comparisons across firms with different financial leverage.

P / EBITDA vs EV / EBITDA

Price to EBITDA is used less commonly than Enterprise Value to EBITDA as a measure of the "price" of a company's stock. The EV / EBITDA ratio is useful because, unlike the price to earnings ratio it is capital structure neutral. P / EBITDA uses a metric in the denominator (EBITDA) which is capital structure neutral, but one in the numerator which is not (as stock price does not account for the company's debt).

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