Debt is an important factor to consider when determining whether or not to invest in a company. Like the enterprise value metric, the enterprise multiple accounts for the impact of long term debt held on the balance sheet. At the same time, it serves as an “apples to apples” gauge of value for international companies. This is because it is calculated using “earnings before interest, taxes, depreciation, and amortization” (or EBITDA for short).
By definition, EBITDA excludes any taxes (which may vary significantly between countries due to differences in tax policy). This allows investors to make more reasonable comparisons between, for example, a US firm and a company based in the UK. In addition, investors on the lookout for companies which may be acquired (since the stock of the acquired company usually enjoys a nice premium) can use the enterprise multiple as a stock screen. The enterprise multiple is defined as:
EM = Enterprise Value / EBITDA
A low enterprise multiple, or a low enterprise multiple vs. industry peers, may be a sign that a company is undervalued.