EV/EBITDA compares enterprise value to earnings before interest, taxes, depreciation and amortisation. Because both halves ignore financing, it compares two companies on operations alone, which makes it more useful than P/E across different debt loads and less useful whenever capital spending matters.
Why it beats P/E for comparison
The P/E ratio divides an equity value by an after-interest profit, so two identical businesses financed differently produce different P/Es. EV/EBITDA removes that. Enterprise value counts debt and subtracts cash, and EBITDA sits above interest, so both sides describe the whole business regardless of who funded it.
That makes it the natural multiple when comparing companies with different balance sheets, and the one acquirers reach for, since a buyer assumes the debt and can refinance it. See enterprise value for how the numerator is built.
What a good multiple looks like
There is no absolute threshold, and anyone offering one is selling something. As rough orientation, mature industrials often trade around 8 to 12 times, software considerably higher, and capital-intensive cyclical businesses lower. The only comparisons that mean anything are against the same company's own history and against direct competitors in the same year.
Where it misleads
It ignores capital spending, which is not optional. Adding depreciation back treats the wearing out of assets as if it were free. For a software company with minimal capex, EBITDA is a fair proxy for cash generation. For a telecom or a manufacturer that must spend heavily every year just to stand still, it flatters enormously. Charlie Munger's objection was that when you see EBITDA you should substitute the phrase "earnings before the costs I do not want you to count".
It ignores stock compensation. Many companies report adjusted EBITDA that also excludes share-based pay, which is a real cost settled in your ownership.
It ignores working capital. A business can grow EBITDA every year while consuming cash, if receivables and inventory grow faster than sales. See working capital.
What to use alongside it
Pair it with EV to free cash flow, which counts the capital spending EV/EBITDA ignores. When the two multiples tell the same story, the multiple is informative. When EV/EBITDA looks cheap and EV/FCF looks expensive, the gap is capex, and the capex is the real story.
As with every multiple, this is a comparison tool rather than a valuation. What the business is worth depends on the cash it will produce, which is an intrinsic value question.
Compare the multiples side by side
Stock Simplifier shows EV/EBITDA next to EV/FCF and the ten-year history for any US stock, so you can see when the gap between them is the whole story. Free to start.
Try Phase Check freeNo credit card. One check without an account, unlimited with a free one.
Frequently asked questions
Related
- Enterprise value, how the numerator is built and why it beats market cap.
- P/E ratio, the multiple EV/EBITDA is usually being preferred to.
- Free cash flow, the number that counts the capex EBITDA ignores.
- EBITDA vs free cash flow, the two measures compared directly.