You should not rely on one ratio, you should analsye a various numbers & ratios to get a

clear view of a companys worth. But yes EV/EBIDTA is a good and an important metric.
Let me explain in a simple manner for other laymen like me, lets start with
understanding what is EV & EBIDTA:
EV (Enterprise Value)
EV = Number of shares x CMP + All debts - Cash on Books
Please note that EV or Enterprise Value is different from Market Cap, because if you buy
a share in a company it also means that you are a also buying into the loans on the
company and you are also the owner of cash on their books, EV takes this into account.
EBIDTA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation
and Amortization)
Think of this as the cash-generating ability of a company from its core business. It simply
means all revenues minus the expenses, the expenses here are only those expenses which
are spent on day to day running of the business. Expenses like Intersts on loans, taxes,
depreciation/ammortization on capital/one time expenses are not taken into account.
Why is EBIDTA important, its because it shows us how profitable or efficient the
operations of the company purely from sales/direct expenses perspective.
EV/EBIDTA
If you divide EV by EBIDTA you arrive at a number(Ratio) which shows the relationship
between the companies pure price in the market v/s that companys pure business
performance.
The advantage of EV/EBIDTA is that with this metric you can compare companies across
sectors, unlike PE metric which is usually valid for same sector company comparison.
Generally a value of 10 for EV/EBIDTA ratio is considered good.
So now coming to your question how you can arrive at a target.
With this ratio you can arrive at how expensive or inexpensive the stock is. So if you are
comfortable with investing in a company with 7.5 EV/EBIDTA, then you can do the
reverse calculation based on projected EBIDTA and arrive at EV and set your target
accordingly.
Please note I'm not talking of Equity Value, I'm referring to Enterprise Value, to arrive at
equity value you can do further calculation by subtracting net debt from EV. And if you
divide the total outstanding shares from Equity Value you can arrive at your target.

You want to use the EV/EBITDA ratio derived from its competitors. Using a company's
own EV/EBITDA ratio will give the share price now.
Multiply the EV/EBITDA multiple derived from its competitors by the EBITDA of the
target company. This will result in an EV. To back out from Enterprise Value to Share
Price:
1. Subtract Net Debt from Enterprise Value
2. Divide the resulting value (equity value) by shares outstanding
Done! However, I must add that technically you want to use forward looking metrics,
diluted shares outstanding, and crest a range instead of a pure target price. Go
toValuationUniversity.com and check out the Comparable Companies Analysis, it will do
a much more comprehensive explanation of the topic as well as provide an excel model
for you to use.

Find the stocks trailing 12-month P/E ratio on the same page. In this example, assume the stock
has a trailing 12-month P/E ratio of 15. This means the market will pay $15 for each dollar of the
companys EPS.

Step 4
Click Competitors, Financial Ratios or a similar link to view information about the companys
competitors. Identify the P/E ratio listed under Industry, which is the average P/E ratio of all
companies in the industry. If the stocks P/E ratio is less than the industry average, the stock
might be undervalued relative to its peers. If the stocks P/E ratio is greater than the industry
average, the stock might be overvalued. In this example, assume the industry average P/E ratio
is 18, which suggests the stock is possibly undervalued.

Step 5
Multiply the stocks P/E ratio by its EPS to calculate its actual market value. In this example,
multiply 15 by $2.50 to get a market price of $37.50.

Step 6
Multiply the industry average P/E ratio by the stocks EPS to estimate the price at which the stock
would trade if its P/E ratio equaled the industry average. In general, companies in the same
industry tend to trade at similar P/E ratios. If a stocks P/E ratio is far off from the industry
average, it might eventually -- but not necessarily -- realign with the industry average. Concluding
the example, multiply 18 by $2.50 to get $45. This means the stock would rise from its current
value of $37.50 and trade at approximately $45 if the market were to value it at the industry
average P/E ratio.