Intrinsic Value By EV To EBITDA Ratio
This calculator computes the intrinsic value of a stock by utilizing the company’s key parameters such as EBITDA, Total Debt, and Outstanding Shares. Where, EBITDA is a crucial metric that indicates the profitability of a company, making it a vital factor for any business to sustain its operations.
Valuation
How EV/EBITDA Ratio Intrinsic Value Calculation Work?
We've developed a slightly different method to calculating the Intrinsic Value with EV to EBITDA Ratio. Median EV/EBITDA plays the biggest role in it. Here is how we develop this formula. First, we take the EV/EBITDA calculation formula and modify it:
EV/EBITDA = Enterprise Value / EBITDA
Enterprise Value = EV/EBITDA x EBITDA
Here, We replace EV/EBITDA with median EV/EBITDA to average out. Or you can take the industry average EV/EBITDA to more industry-specific results.
Now, we use the calculated Enterprise Value to find the equity value. It is a useful metric that calculates the total value of a company that is available to its shareholders.
Equity Value = Enterprise Value - Debt / Total No. of Shares (Outstanding Shares)
The final Equity Value = Intrinsic Value of the Stock
While we understand how it's calculated, it's essential to also understand the key metrics involved, such as Enterprise Value, EBITDA, EV/EBITDA, etc. Let's delve into these metrics and their limitations so that you know when they should be used and when not consider.
Frequently Asked Questions
The Enterprise Value (EV) metric is crucial for accurately assessing a company's total financial worth. While market capitalization provides a similar measure, EV offers a more precise valuation.
This is because EV considers the debt of the company that fuels its growth, which is essential for understanding the true value of any well-established company. It excludes highly liquid assets such as short-term investments and marketable securities, which are less relevant metrics in this context.
It can be calculated in multiple ways, such as
Formula 1. Enterprise Value (EV) = Market Capitalization + Total Debt – Cash and Equivalents
Formula 2. Enterprise Value = EV/EBITDA x EBITDA
Formula 3. EV = Common Shares + Preferred Shares + Market Value of Debt + Noncontrolling Interest – Cash and Equivalents
Mostly, stable, old, and large-cap companies provide good and consistent dividends to their shareholders. Stocks with consistently higher dividend yields are also called value stocks.
Disadvantages:
- Not useful for industries that need High-debt.
- It includes total debt but does not show how well the company utilizes the debt.
- Can fluctuate significantly with market conditions.
- Does not account for significant non-operating assets.
EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. It focuses on the core operating performance of a company by excluding its capital investments, including plant, property & equipment and expenses related to debt. This allows for a clearer view of how well the business itself is performing.
There are two formulas to calculate EBITDA.
Formula 1: EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
Formula 2: EBITDA = Operating Income + Depreciation + Amortization
Disadvantages:
- Does not include capital expenditures necessary for growing the business.
- Not useful for asset-heavy companies as it excludes non-cash expenses.
- Excludes taxes, which can be a real cost to the business.
- Can be manipulated by excluding certain expenses to make financial performance appear better.
- Not as transparent as cash flow.
The EV/EBITDA ratio is a helpful measure to determine if a company is priced below or above its earnings potential. A lower EV/EBITDA ratio usually suggests that the company might be undervalued.
Disadvantages:
- Not suitable for all industries.
- The ratio doesn't consider the growth rates of companies.
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Disclaimer: The financial blogs and tools provided on this website are for informational purposes only. We do not constitute financial advice, and the accuracy or completeness of the information cannot be guaranteed. Users are encouraged to conduct their own research and seek professional financial advice before making any investment decisions.