Also known as the EBITDA Multiple.
A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several reasons:
1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies.
2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with a low enterprise multiple can be viewed as a good takeover candidate.
Keep in mind that enterprise multiples can vary depending on the industry. Therefore, it's important to compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in high growth industries (like biotech) and lower multiples in industries with slow growth (like railways).
Investment dictionary. Academic. 2012.
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