The table below lists the current & historical Enterprise Multiples (EV/EBITDA) by Sector. The multiples are calculated using the 500 largest public U.S. companies. Comparing the current enterprise multiple of a sector/industry to its historical average value can be used to evaluate whether the sector is currently undervalued or overvalued. Note: The ratio is not available for the Financials sector, as EBITDA is not a meaningful measure for financial companies.
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EV/EBITDA Multiple by Sector (Large Cap U.S. Companies)
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How the EV/EBITDA multiple by Sector is calculated?
The EBITDA multiple for a specific sector is calculated by dividing the total enterprise value of all sector companies by the sum of their total annual EBITDA.
Here’s how we are calculating the EV/EBITDA multiple for a specific sector:
1.Calculate EV: Calculate the Enterprise Value (EV) for each company. EV is calculated as the market capitalization (total market value of outstanding shares) plus the total debt of the company, minus cash and cash equivalents. The formula is:
EV = Market Capitalization + Total Debt – Cash and Cash Equivalents
2. Calculate EBITDA: Calculate the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for each company, using the latest four quarters (trailing twelve months) of reported data that is available. The formula is:
EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization
Note: When the historical multiples are calculated, it’s important to use the financial results available at the time. There is always a lag between the end of a fiscal quarter and the date when companies are actually reporting their quarterly results.
3. Calculate EV/EBITDA by Sector: Calculate the EBITDA multiple of a Sector by dividing the total enterprise value of all sector companies by the sum of their total annual (trailing twelve months) EBITDA. Pay in mind that comparing the EBITDA multiple of one sector/industry to another sector does not offer much indication of the relative valuations of different industries. The multiple works the best when the current multiple is compared to the historical average multiple of the sector.
Using EV/EBITDA to value companies
Enterprise value to EBITDA is a popular multiple that is used to measure the value of a corporation. The ratio can be seen as a capital structure-neutral alternative for Price/Earnings ratio. When valuations of different companies are compared to each other, the enterprise multiple is often considered more suitable than P/E. Using P/E ratio for comparative analysis can be misleading due to different amounts of leverage, different accounting practices related to depreciation and different tax rates.
The multiple is most commonly used to evaluate industrial and consumer industries. It is more rare to use the ratio for financial or energy companies. For oil & gas companies, there are various industry specific valuation multiples like EV to Reserves, EV to Production and EV to Capacity. Banks and insurance companies are most commonly evaluated using the price-to-book ratio.