EV/EBITDA
EV/EBITDA is a valuation multiple equal to a company's enterprise value divided by its earnings before interest, taxes, depreciation and amortisation. It shows how many times a company's core operating cash earnings the market is paying for the whole business. Because it uses enterprise value and pre-financing profit, it allows comparison across firms with different debt levels and tax situations.
Worked example
A company has an enterprise value of $950 million and EBITDA of $100 million. EV/EBITDA = $950,000,000 ÷ $100,000,000 = 9.5. The market values the business at 9.5 times its annual operating earnings.
Why it matters
EV/EBITDA is favoured for comparing companies and for merger and acquisition valuations because it is neutral to capital structure and ignores accounting differences in depreciation. The main pitfall is that EBITDA excludes real costs: it ignores capital expenditure and the interest a leveraged firm must actually pay, so it can flatter capital-intensive or heavily indebted businesses. It works best alongside cash-flow and debt measures rather than on its own.
Frequently asked questions
What is a good EV/EBITDA ratio?
As a rough guide, many mature companies trade around 8 to 12 times EBITDA, but the right level depends heavily on industry, growth and interest rates. A lower multiple can signal value or simply lower expected growth.
Why use EV/EBITDA instead of the P/E ratio?
EV/EBITDA strips out the effects of debt, taxes and depreciation policy, so it compares the underlying operating business more fairly across companies. The P/E ratio, by contrast, is affected by leverage and tax differences.
Related terms: Enterprise Value, P/E Ratio