The EV/EBITDA ratio

An alternative to the P/E ratio that is often used is the valuation multiple or enterprise multiple called EV/EBITDA. EV stands for Enterprise Value and takes equity as well as debt into consideration. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The advantage of this ratio over P/E ratio is that it takes debt into account in the numerator and the denominator is not distorted by the effects of individual countries' taxation policies. The enterprise multiple looks at a firm as a potential acquirer would. Obviously, a company with a low enterprise multiple can be viewed as a good takeover candidate.

Keep in mind though 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. High growth industries command higher enterprise multiples and slow growth industries have lower multiples.