EV/EBITDA compares a company's enterprise value to its EBITDA — earnings before interest, taxes, depreciation, and amortisation. Put plainly: what you'd pay to buy the entire business, divided by the rough operating cash it throws off in a year.
Analysts reach for it over P/E in a lot of situations, and the reason is in what each side of the ratio strips out.
The two pieces
- Enterprise value (EV) is market cap plus net debt. It's the cost to acquire the whole company — you'd pay the equity holders and inherit the debt. That's why it's the right numerator when you want to compare businesses with different amounts of borrowing.
- EBITDA approximates operating profit before financing and accounting choices muddy it. Stripping out interest, tax, and depreciation makes two companies more comparable even if one is heavily levered or in a different tax regime.
Because EV includes debt and EBITDA excludes interest, the ratio is capital-structure-neutral — a debt-heavy company and a debt-free one can be compared on the same footing. P/E can't do that; its denominator is already after interest.
A quick example
A company with a $4B market cap and $1B of net debt has an EV of $5B. If EBITDA is $500M, EV/EBITDA is 10x.
Where it falls short
- It ignores capital intensity. EBITDA adds back depreciation, so a company that must constantly spend on equipment looks as cheap as one that doesn't — even though the real cash isn't comparable. For capital-heavy businesses, EV/EBIT or a cash-flow measure is fairer.
- It's not free cash flow. EBITDA flatters the picture by skipping capex, working capital, and taxes. Treat it as a starting point, not the cash you'd actually pocket.
Bottom line
EV/EBITDA prices the whole enterprise against its core operating profit, neutralising debt and tax so cross-company comparisons hold up. It's usually the better relative-value lens than P/E — as long as you remember it quietly ignores what it costs to keep the business running.