EV/EBITDA – Enterprise Value to EBITDA Ratio
EV/EBITDA is a valuation metric that compares total enterprise value with operating profit before depreciation. It's popular for comparing companies with different capital structures.
How EV/EBITDA is Calculated
Basic formula:
Where Enterprise Value is calculated as:
And EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
How to Interpret the Result
The value indicates how many years it would take to "pay off" the company's value from EBITDA (simplified).
| EV/EBITDA | Interpretation |
|---|---|
| < 6 | Potentially undervalued |
| 6–10 | Average valuation |
| 10–15 | Above-average valuation |
| > 15 | Premium valuation or growth company |
Example: A company has EV of $10 billion and EBITDA of $1 billion. EV/EBITDA is 10. This means the company's value equals 10 times its annual operating profit before depreciation.
Why EV/EBITDA Instead of P/E
EV/EBITDA has several advantages over P/E:
| Property | EV/EBITDA | P/E |
|---|---|---|
| Effect of leverage | Neutral | Increases P/E |
| Effect of depreciation | Neutral | Reduces earnings |
| Company comparison | Better | Problematic |
| Negative earnings | Still usable | Cannot use |
Example: Two companies with the same operations, but one has more debt. P/E will differ (interest reduces earnings), but EV/EBITDA will be similar.
Enterprise Value – Why Not Market Cap
EV includes the entire capital structure:
| Component | Meaning |
|---|---|
| Market Capitalization | Value for shareholders |
| + Debt | Value for creditors |
| − Cash | Reduces net acquisition price |
When acquiring a company, the buyer takes on its debt but gains its cash. Therefore, EV better reflects the true "price" of the company.
Industry Differences
Typical EV/EBITDA values:
- Utilities – 6–9 (stable, regulated)
- Industrials – 7–10 (cyclical)
- Consumer Staples – 8–12 (stable demand)
- Healthcare – 10–15 (growth)
- Technology – 12–20+ (high growth)
- Software, SaaS – 15–30+ (scalable)
When EV/EBITDA Fails
The metric has limitations:
- CapEx-intensive companies – EBITDA overestimates actual cash flow
- Negative EBITDA – cannot use
- Working capital – changes are not captured
- Leasing – operating leases may distort results
For CapEx-intensive companies, EV/EBIT or EV/FCF is better.
EV/EBITDA vs. Other Valuation Metrics
| Metric | When to Use |
|---|---|
| EV/EBITDA | Comparing companies with different leverage |
| P/E | Quick overview, profitable companies |
| P/FCF | Focus on actual cash flow |
| P/S | Unprofitable or growth companies |
How to Use the Indicator in Practice
For comprehensive valuation, combine EV/EBITDA with:
- P/E – traditional valuation
- P/FCF – cash flow-based valuation
- PEG – accounting for growth
- ROIC – business quality
Always compare with competitors and company's historical values.
Practical Tip
If a company has significantly lower EV/EBITDA than competitors, it may be undervalued – or have problems. Verify the reason: declining revenues, high CapEx, management issues. Low EV/EBITDA alone is not a reason to buy.