This multiple is similar to Earnings Yield, but here we use Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as Nominator). By doing this, we can compare companies with different capital structures and capital expenditures. This way it gives a much better idea of the value of a company compared to the popular P/E ratio. As O'Shaughnessy explains:
Stocks that have very high debt levels often have low PE ratios, but this does not necessarily mean that they are cheap in relation to other securities. Stocks that are highly leveraged tend to have far more volatile PE ratios than those that are not. A stock's PE ratio is greatly affected by debt levels and tax rates, whereas EBITDA/EV is not. To compare valuations on a level playing field, you need to account for how a company is financing itself and then compare how relatively cheap or expensive it is after accounting for all balance sheet items.
You can think of it as taking all the revenue and subtracting the costs that solely go into running the business. The downside of EBITDA is that it can be abused by companies declaring it as “one-off” costs things that should really be considered normal costs. We use the EBITDA of the last 12 months.
As denominator it uses Enterprise Value. The formula is as follows:
EBITDA/EV has been identified in many academic studies as one of the most predictive valuation factors.
- In the 4th edition of 'What works on Wall Street', O'Shaughnessy reported that in his backtests, EBITDA/EV earned the best absolute return over the testing period (1963-2009), unseating all other ratios examined, and doing this with a relatively low volatility.
- Gray & Vogel found the EBITDA/EV to be the best performing metric, outperforming investor favorites such as Price-to-Earnings, Free Cashflow to EV, and Book-to-Market in the period 1971-2010. They also found in contrast to prior empirical work, that long-term ratios add little investment value over standard one-year valuation metrics. Click here to download their study.
In the scorecard, we show the EBITDA Yield for the selected stock. We also calculate the median EBITDA Yield for all stocks, the company's sector, industry group, and industry. Finally, we include the percentile so you can easily compare a company to its peers. For more information, click here.
In our screens:
O'Shaughnessy Trending ValueIn the fourth edition of his bestselling value quant book 'What works on Wall Street', James O'Shaughnessy devised anew screen which is called "the top stock-market strategy of the past 50 years".. more...
In our scorecard manual:
Value FactorsA company can be cheap overall, but how does it compare to the selected stock universe and its peers?. more...