In one sentenceA valuation multiple that divides enterprise value by earnings before interest, taxes, depreciation, and amortization, used to compare the prices of similar businesses.
Simply put
The multiple answers the question: how many times its annual operating earnings does the buyer pay for the whole business?
It is preferred over the P/E ratio when comparing businesses that differ in their debt or depreciation policies, because it is not affected by financing cost or depreciation. The appropriate multiple varies from one industry to another, so always compare with businesses in the same industry.
Worked example
The distribution company in the “Enterprise value” example is valued at 13,000,000 SAR and achieved annual EBITDA of 2,600,000 SAR.
Enterprise value13,000,000 SAR
EBITDA2,600,000 SAR
Multiple = 13,000,000 ÷ 2,600,0005 times
Formula: Enterprise value ÷ EBITDA
Don't confuse it with
Price-to-earnings ratioThe P/E ratio compares the share price with net profit after interest and taxes, so it is affected by the business's debt.