Private equity is getting increasingly expensive. As a result, the pricing of an average deal today, by the EV/EBITDA metric, is expected to be at a premium relative to the last decade.
The EV/EBIDTA ratio breaks down into two parts:
- Enterprise Value (EV): Adding debt to market capitalization, while subtracting cash gives us the enterprise value. This gives us the total value of a company.
- EBITDA: Earnings before interest, tax, depreciation, and amortization or, EBITDA, provides a popular way to look at earnings. By removing these expenses, we obtain a clearer look at operating performance.
Overall, EV/EBITDA shows the relationship between a company’s total value and its earnings, and is often seen as the price-to-earnings ratio’s sophisticated sibling, used to view companies the way acquirers would.
Source: https://www.visualcapitalist.com/ballooning-valuations-in-private-equity-deals/
