Enterprise value is the total value of a company:
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash – short term investments
Cash is subtracted as we are looking from an acquirer’s perspective. We can use enterprise value to create a ratio of the value of the overall company using the EV/EBITDA:
EV/EBITDA = enterprise value/EBITDA
Where:
EBITDA = recurring earnings from continuing operations + interest + taxes + depreciation + amortization
or for forecasting
= EBIT + depreciation + amortization
The EV/EBITDA ratio is useful in negative EPS situations, as well as for value firms with different leverage levels or valuing capital-intensive firms. However, EBITDA can overstate CFO if working capital is growing and does not account for capital expense as well as FCFF measures.