Which valuation ratio is most commonly used in Mergers and Acquisitions?

The EV/EBITDA ratio is widely utilized in mergers and acquisitions due to its ability to provide a more comprehensive view of a company's valuation by taking into account its overall enterprise value relative to its earnings before interest, taxes, depreciation, and amortization. This ratio is particularly effective for M&A analysis because it normalizes for differences in capital structure, making it easier to compare companies across various industries and jurisdictions.

Using enterprise value in the numerator allows acquirers to assess the total value of a company, including both equity and debt, which is essential when evaluating the price to be paid in an acquisition. On the other hand, EBITDA serves as a proxy for the operating profitability of the company, indicating how much cash flow is being generated from core operations.

While other valuation ratios, such as the P/E ratio and price to book value, do have their uses, they often do not provide as clear a picture when companies have varying levels of debt or are in different stages of their capital structure. The debt to equity ratio is primarily a measure of financial leverage rather than a valuation tool. Thus, EV/EBITDA stands out as the most relevant and commonly used valuation metric during M&A transactions.