Glossary
EV/EBITDA explained
EV/EBITDA is a valuation multiple that divides a company's enterprise value by its EBITDA, or earnings before interest, taxes, depreciation, and amortization. It tells you how the whole business, debt and equity together, is priced against the operating cash earnings it produces. Because enterprise value includes debt and EBITDA is measured before interest, the multiple lets you compare companies with different debt loads on even footing, which price-to-earnings cannot do. Investors mostly use it to line a company up against its peers: a stock trading at a lower EV/EBITDA than similar businesses may be cheaper, though a low multiple can also flag slower growth or a real problem.
By The Brief Equity Team · Published
What EV/EBITDA measures
The multiple prices the entire enterprise against the cash its operations throw off before financing and accounting choices muddy the picture. EBITDA strips out interest, taxes, depreciation, and amortization to approximate raw operating earnings, and enterprise value covers what it would cost to buy the whole business, so the ratio compares like against like.
EBITDA is a proxy for operating cash generation. By stripping out interest (a financing choice), taxes (a jurisdiction and structure choice), and depreciation and amortization (non-cash accounting entries), it tries to isolate what the core operations earn before those layers.
Pairing that with enterprise value, which counts debt and nets out cash, keeps both halves of the ratio on the same basis. You are comparing the price of the whole business to the earnings available to everyone who financed it.
Why use it instead of the P/E ratio
| Question | P/E ratio | EV/EBITDA |
|---|---|---|
| What does it price? | Just the equity value | The whole business, debt and cash included |
| Debt handling | Ignores capital structure | Neutral across different debt loads |
| Below-the-line items | Affected by interest and taxes | Measured before both |
The P/E ratio divides price by earnings per share, so it looks only at the equity slice and sits after interest and taxes. That makes it quick but blind to how a company is financed.
EV/EBITDA sidesteps both problems, which is why bankers and analysts lean on it when comparing acquisition targets or peers with different debt levels.
What counts as a good EV/EBITDA
There is no universal good number. A slow-growing utility might trade near seven or eight times EBITDA while a fast-growing software company trades at twenty or more, and both can be fairly priced. The multiple only means something against a peer group, the company's own history, and the growth rate behind it.
The right yardstick is a peer group of similar businesses. A software company should be judged against other software companies, not against a utility, because their growth, margins, and capital needs differ enough to justify very different multiples.
It also helps to track a company's multiple against its own history. A stock trading well below its typical range may be cheap, or the market may be pricing in a genuine deterioration you should understand before acting.
Where EV/EBITDA falls short
- EBITDA ignores capital spending, so it flatters businesses that must constantly reinvest to stay alive.
- It sits before taxes and interest, which are real cash costs a shareholder ultimately bears.
- Depreciation stands in for the wear on real assets, and adding it back can overstate true earning power.
- Two companies can carry the same multiple while one grows and the other shrinks.
The sharpest criticism is that EBITDA ignores capital expenditures. For a capital-intensive business, telecom, or manufacturing, the cash spent maintaining equipment is a real and recurring cost, and a multiple that pretends otherwise flatters the company.
Charlie Munger and others have long warned against treating EBITDA as if it were true earnings. Use the multiple as one lens among several, alongside free cash flow and the P/E ratio, rather than a verdict on its own.
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Models
Value it yourself
Build a DCF and EV/EBITDA model on your own assumptions, with Bear, Base, and Bull scenarios, sensitivity and Monte-Carlo analysis, and peer comps.
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What is enterprise value (EV)
Enterprise value is the takeover price of a whole company: market cap plus debt minus cash. It measures what a buyer truly pays, and anchors multiples like EV/EBITDA.
Read guideGlossary
What is the P/E ratio
The P/E ratio is share price divided by earnings per share: what investors pay for each dollar of profit. A high or low number only means something in context.
Read guide
Frequently asked questions
- What does EV/EBITDA tell you?
- It shows how the entire business, equity plus debt minus cash, is priced against its operating cash earnings. A lower multiple than comparable companies can point to a cheaper valuation, but it can also reflect slower growth or higher risk.
- What is a good EV/EBITDA ratio?
- There is no universal figure. It depends on the sector and growth: a slow-growing utility may trade near seven or eight times EBITDA while a fast-growing software firm trades far higher. Compare a company to its peers and its own history rather than a fixed benchmark.
- Why use EV/EBITDA instead of the P/E ratio?
- EV/EBITDA is neutral to how a company is financed. Because enterprise value includes debt and EBITDA sits before interest, it lets you compare firms with different debt loads fairly, which the P/E ratio cannot do.
- What are the drawbacks of EV/EBITDA?
- EBITDA ignores the capital spending a business needs to survive, sits before taxes and interest that shareholders still bear, and adds back real depreciation. Two companies can share a multiple while one grows and the other shrinks.
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