What it is:
How it works/Example:
The enterprise multiple has many uses. In addition to helping investors determine if a company is over- or undervalued, it is also used by analysts to examine companies during the due diligence process that precedes a potential acquisition.
To determine the enterprise multiple, you much first find the company's enterprise value (market capitalization + value of debt, minority interest, and preferred shares - value of cash and cash equivalents). Once you know the company's EV, simply divide by the company's EBITDA.
Enterprise Multiple = EV/EBITDA
A company with a low enterprise multiple is considered to be an attractive takeover candidate (and investment), because it reflects a low price for the value of the company (more company for your dollar). Enterprise multiples are compared to other companies within the same industry and not across industries in order to obtain an insightful assessment.
Why it matters:
The enterprise multiple ratio is considered a more accurate barometer of the firm's value than the price-to-earnings (P/E) ratio since it discounts various countries taxing policies and takes into account debt and cash on hand. The enterprise multiple provides a more accurate insight into the company as it provides the acquirer with better information about the company's prospects and will prevent the acquirer from overpaying as well as avoid a potentially inferior acquisition.