Treasury Practice

Enterprise value multiple

Published: Sep 2013

Calculating EVM

\(\mathrm{EVM}=\frac{Enterprise\: value}{\:EBITA}\)

  • Enterprise value

    =market capitalisation + debt + minority interest + preferred shares – total cash and cash equivalents.


    Earnings before interest, taxes, depreciation and amortisation = operating income + depreciation + amortisation

EV is a useful metric to use when discussing a company’s valuation because it represents the real value of a business. For example, if a business is sold for a sum of ¥100 billion, but had debts totalling ¥100 billion, then the EV would be zero. By dividing a company’s EV by its EBITDA, we can calculate the EVM, taking into account the business’s value, including stock price and debt levels, and relates that value to its cash profitability.


Company ABC
Market capitalisation ¥90 trillion
Debt ¥1.5 trillion
Minority interest ¥3.5 trillion
Preferred shares ¥4 trillion
Cash/cash equivalents ¥2 trillion
EBITA ¥10 trillion

Using these figures, company ABC’s EV is: \(¥\:99trillion\:–\:¥\:2trillion\:=\:¥\:97trillion\)

The company’s EVM can therefore be calculated as follows: \(\frac{¥\:97trillion}{¥\:10trillion}\:=\:¥\:9.7trillion\)

Using EVM

The EVM is popular with investors as, unlike other calculations such as the P/E ratio, it is unaffected by differences in depreciation policy or changes in capital structure. Lower earnings per share, and hence a higher P/E ratio, would result if a company chose to raise equity finance and used the funds to repay loans. But the EVM would not be affected by this change in capital structure, and using it means it is possible to draw comparisons between companies with different capital structures.

A second benefit of the EVM is that it eliminates the effects of all the non-cash expenses, such as depreciation and amortisation, and focuses instead upon the thing which investors are really interested in: cash flow.

Limitations and caveats

One significant limitation of the EVM is that it should only be used with caution when comparing businesses across the same industry. Capital requirements can vary considerably between industries, and whether an industry is characterised by high or low growth will often determine the EVM. Several other limitations can also be identified:

  • EVM is useful for comparing companies that have a similar level of capital intensity. Higher capital intensity results in a lower EVM which could mislead investors.
  • EVM cannot be used when cash flow is negative – typically, a normalised EBITDA or a forward multiple are used instead.

When using the EVM it is important to ensure that EV and EBITDA are calculated for the same business. If a company has part-owned subsidiaries, for example, one must ensure that only the proportion of EBITDA in a subsidiary owned by the company in question is included in the calculation. Alternatively, adjusting the enterprise value multiple to include the shares not owned by the company will give the EVM for the whole group. Finally, the EVM should not be applied as a standalone measure. Prudent companies and investors will always look to achieve the most comprehensive analysis possible by using the measure along with a wide variety of other statistics.

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