Lesson 15 of 16
An analyst can also use a multiple based on enterprise value for valuing a firm.
The enterprise value here refers to the total market value of the whole business. You can also refer to it as the value at which the business can be sold.
Apart from this, any minority interests will be added and any associate company will be deducted at market value.
In a value multiple, the numerator is the enterprise value of the firm, and the denominator is a measure of the revenue, earnings, or book value of the firm. The most commonly used measure if the EBITDA (Earnings Before, Interest, Tax, Depreciation, and Amortization). Since the enterprise value includes both the equity and the debt of the firm, EBITDA is a suitable measure because it includes earnings before debt payment.
While calculating the enterprise value multiple, most of the values are readily available, except the market value of debt. In such a case, the analyst can make an assumption about the market value of debt, by comparing it with the market values of similar bonds.