EV/EBITDA, Distinction between EV and Equity Value

Enterprise Value vs Equity Value

From time to time, the term of enterprise value or equity value is used without distinction. Are they the same meaning? Or different? Let’s look at the following analogy to understand the difference between the two easily.


There are two equally priced flats in London as follows.



Flat A

Flat B




Owner’s mortgage loan




Mr X and Ms Y purchased respectively A and B at the above price with succeeding to the mortgage loan from the existing owners. In other words, X took over the loan of £600,000 and purchased the flat A with his own money of £400,000. Y also did so and paid her capital of £800,000 for the flat B. Here, how much did X and Y buy each flat for? The details of the funds X and Y mobilised to buy the flat are as follows.



Breakdown for X

Breakdown for Y

Succession of existing mortgage loans



New owner’s equity capital




The answer to the above question is X and Y all purchased each flat for £1million. The equity capital mobilised by each is respectively £400,000 and £800,000. However, the flat price is all £1,000,000, so both X and Y acquired them at that price.



Definition of Enterprise value (or Firm value)

You can apply that concept to companies. Considering the above flats as firm A and firm B, the enterprise value of A and B is all £1,000,000. And the equity value is respectively £400,000 and £800,000. A’s mortgage loan of £600,000, and B’s £200,000 belong to banks. When reflecting the concept, the relationship between enterprise value (or firm value) and equity value is defined as follows.


Enterprise Value = Debt holder’s value + Equity holder’s value


The word of enterprise value or equity value is used indiscriminately, but they are different. Enterprise Value (EV) includes the interests of shareholders and creditors, and equity value reflects only the interests of shareholders. Therefore, the sum of shareholder’s value and creditor’s value is the value of the entire firm.


From the standpoint of acquiring a company, EV is the actual acquisition price. Like the flats above, the amount paid when buying a company is only equity value. However, the buyer is also succeeding to all the debts.


Note that the debts considered in EV are only financial debts that pay interest, not operating debts such as accounts payable.



What is EBITDA?

You can also interpret EV as the market value of capital that incurs Earnings Before Interest, Taxes, Depreciation and Amortisation, namely EBITDA. Take a look at the figures below.



EV is the sum of financial liabilities and equity capital in the creditor part of the balance sheet. And the interested party for each is debtholders and shareholders. With the capital from two parties, a firm generates sales, and then interest goes to debtholders, and net income is left to shareholders.


Therefore, you can say that EV generates operating profit and equity creates net income.


Meanwhile, tangible and intangible depreciation expenses are a typical non-cash expense. The sum of two depreciations and operating income is called EBITDA, which is used as an indicator of profit generated by EV. You can calculate EBITDA by adding interest, corporate tax, and depreciation and amortisation to net income. But the easier way is to add two depreciations to operating income. Extraordinary gains or losses regardless of operation are non-recurring, so they are literally regarded as not incurred.


EBITDA = Net income + Interest + Tax + Depreciation and Amortisation ≈ Operating Income + Depreciation and Amortisation




The PER, PBR, and PSR in relative valuation are all equity multiple, whereas EV/EBITDA is an EV multiple. The reason why EV and equity value are explained in detail above is to distinguish that. EV/EBITDA is a multiple of EV divided by EBITDA.



There are two reasons for subtracting cash from EV in the denominator.

● One is that EBITDA includes interest expense but not interest income from cash held. Therefore, EV/EBITDA will be overvalued unless you exclude the cash held by the firm.

● The other is to consider only the debts that have been left after you have paid off with the cash on hand. You could understand the concept easier when you see it from the perspective of acquiring a company. Compare two cases.

  1. Suppose that you took over firm A, which has had a financial debt of £100, by paying £100 to the equity holder. In this case, you purchased it for a total of £200.
  2. This time, suppose the firm A held £50 in cash as well as that financial debt. And you paid £100 to the equity holder to take it over. Then, you could pay off £50 of the financial debt of £100 with the cash of £50 in the firm A. In this case, you can say that you bought the firm A at £150.


The reasons why EV/EBITDA is useful are as follows.

  • First, EBITDA may be in the black even for companies with a loss in net or operating income. Therefore, there are more companies that you can value.
  • Second, even though each company recognises depreciation on a different accounting basis, it does not affect EBITDA because depreciation is added to operating income.
  • Third, since net income is profit after interest, the proportion of borrowings affects it. However, since EBITDA is profit before interest, the size of a company’s borrowing does not affect it.


For those reasons, you can usefully use EV/EBITDA in infrastructure projects that require long-term capital expenditures such as telecommunications, aviation, ports, and roads.



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