EV/EBITDA

EV/EBITDA, sometimes called the enterprise multiple, compares what a whole company is worth, including its debt, with its operating earnings before interest, taxes, depreciation and amortization.

Example: a company has an enterprise value of $12 billion and EBITDA of $1.5 billion. Its EV/EBITDA ratio is 8. Put simply, the company is valued at eight times its yearly EBITDA.

The ratio is popular because both parts of it are independent of how a company is financed. The P/E ratio can look very different for two otherwise similar companies if one has lots of debt and the other has none. EV/EBITDA largely removes that distortion, which is why it is widely used in industry comparisons and in mergers and acquisitions.

A lower ratio can suggest a cheaper valuation, but typical levels differ a lot by industry and growth rate. The ratio also inherits the weaknesses of EBITDA: it ignores capital spending, changes in working capital and taxes, and adjusted EBITDA figures can flatter results. It is not meaningful when EBITDA is negative.

Investors therefore often use EV/EBITDA alongside free cash flow and P/E rather than on its own.