what enterprise multiple can tell you
investors mainly use a company s enterprise multiple to determine whether a company is undervalued or overvalued a low ratio relative to peers or historical averages indicates that a company might be undervalued and a high ratio indicates that the company might be overvalued an enterprise multiple is useful for transnational comparisons because it ignores the distorting effects of individual countries taxation policies it s also used to find attractive takeover candidates since enterprise value includes debt and is a better metric than market capitalization for merger and acquisition m a purposes enterprise multiples can vary depending on the industry it is reasonable to expect higher enterprise multiples in high growth industries e g biotech and lower multiples in industries with slow growth e g railways enterprise value ev is a measure of the economic value of a company it is frequently used to determine the value of the business if it is acquired it is considered to be a better valuation measure for m a than a market cap since it includes the debt an acquirer would have to assume and the cash they d receive example of how to use enterprise multipledollar general dg generated 3 86 billion in ebitda for the trailing 12 months ttm as of the year ended jan 28 2022 the company had 344 8 million in cash and cash equivalents and 14 25 billion in total debt for the same ended year 1the company s market cap was 56 2 billion as of april 4 2022 2 dollar general s enterprise multiple is 18 2 56 2 billion 14 25 billion 344 million 3 86 billion at the same time last year dollar general s enterprise multiple was 17 4 the increase in the enterprise multiple is largely a result of the near 1 billion decrease in cash on their balance sheet while ebitda decreased just around 300 million in this example you can see how the enterprise multiple calculation takes into account both the cash the company has on hand and the debt the company is liable for 1limitations of using enterprise multiplean enterprise multiple is a metric used for finding attractive buyout targets but beware of value traps stocks with low multiples because they are deserved e g the company is struggling and won t recover this creates the illusion of a value investment but the fundamentals of the industry or company point toward negative returns investors assume that a stock s past performance is indicative of future returns and when the multiple comes down they often jump at the opportunity to buy it at a cheap value knowledge of the industry and company fundamentals can help assess the stock s actual value one easy way to do this is to look at expected forward profitability and determine whether the projections pass the test forward multiples should be lower than the ttm multiples value traps occur when these forward multiples look overly cheap but the reality is the projected ebitda is too high and the stock price has already fallen likely reflecting the market s cautiousness as such it s important to know the catalysts for the company and industry 