In the Investment Banking there is often used term EV/EBITDA or just EBITDA multiplier to evaluate company value and comparing the companies in the same sector. This multiplier is often used to find out if the shares might be cheap or overvalued in comparison to the other companies in the market.
EV (Enterprise Value) is the whole company market value.
Enterprise value = Equity value (Market Cap) + loans – cash (Net Debt).
So if you would like to compare your company value to listed companies of recently made deals you should keep in mind that to calculate the equity value (value for the owners) you have to deduct the loans and add cash. The cash is added to the shares value because this could be paid out as dividends or financing the purchase, that would lower the whole deal value.
EBITDA (Earnings before interest, taxes, depreciation and amortization) is an accounting term. It shows how much money the company is able to generate. You should keep in mind that every company needs investments into assets to continue its activities and that is not taken into account in EBITDA. Also the speed of paying and receiving of invoices is not taken into account. Due to the fact that EBITDA is not influenced but the company financing structure (equity vs. loans) and countries TAX systems it makes it easier to compare companies’ performance in the same sector.
EV/EBITDA multiplier shows basically the break-even point, with how many years it will take the investor to get its money back, based on the assumption that the EBITDA level will remain at the same level. EBITDA multipliers vary in different sectors so it is not correct to compare multipliers in the different industries. Companies who have lower risks and lower loans ratio should have lower EBITDA multiplier. Enterprises that have high growth potential or with high depreciation ratio should have higher EBITDA multiplier.
In the following table there are shown some examples of European listed companies average EV/EBITDA in different sectors. The data has been collected by New York University professor Aswath Damodaran and in each sector there are companies from twenty to couple of hundereds.
Source: Aswath Damodaran http://people.stern.nyu.edu/adamodar/
Estonian listed utility company Tallinna Vesi shares EV/EBITDA multiplier was in the beginning of the year 9.85 and European market average was 11.8. From that we could make an assumption that Tallinna Vesi EV could have been worth in Europe 373M€ instead of 301M€ that it was. European average was 24% higher. Tallinna Kaubamaja EV was 293M€ and the multiplier 8.84. Europe average was 10.63 in the same sector which is 25% higher. Merko Ehitus and Nordecon EV/EBITDA multiplier was 7.48 and 6.39 that is 19% and 61% lower than European average 9.08. Based on this data we could conclude that Estonian listed companies stocks are over 20% cheaper than European average.
If you would like to calculate your company value based on the table you have to keep in mind that listed companies stocks are more liquid and attractive. Selling of non-listed companies’ shares is more complicated and invertors expected return is higher. So you should discount you shares price multiplier 30-40% depending on the sector and comparability of the listed companies activities, size and markets.
Erki Katkosild, Investment Agency OÜ analyst