Why use EV/EBITDA instead of P/E?

The P/E ratio ignores debt and is affected by tax and interest. EV/EBITDA includes debt in the value and strips out financing effects, so it compares businesses with different capital structures more fairly — useful in industries that carry a lot of debt.

What is a good EV/EBITDA multiple?

It varies widely by sector. Compare a company to its own history and to close peers rather than to a fixed number; a lower multiple is cheaper, all else equal.

Glossary term

EV/EBITDA

EV/EBITDA divides enterprise value (market cap plus net debt) by EBITDA. It values the whole business regardless of how it is financed, which makes companies with different debt levels comparable.

Formula Enterprise value ÷ EBITDA

EV/EBITDA is one of the professional’s favourite valuation multiples. It compares what a whole business is worth to the operating earnings it produces.

The two pieces

Enterprise value (EV) is the value of the entire company: market capitalisation plus net debt. It’s what it would cost to buy the business outright, debt included.
EBITDA approximates operating earnings before financing and accounting effects.

Divide one by the other and you get how many years of operating earnings the whole business is valued at.

Why analysts like it

Unlike the P/E ratio, EV/EBITDA:

includes debt in the value, so a company can’t look cheap simply by borrowing heavily,
removes financing and tax effects, making cross-company comparison cleaner.

This makes it especially useful for comparing capital-intensive or highly indebted businesses.

A company with a market cap of €800m and €200m of net debt has an EV of €1,000m. If EBITDA is €125m, EV/EBITDA is 8×.

The limitation

EV/EBITDA inherits EBITDA’s blind spot: it ignores the real cost of replacing assets (capex). For capital-hungry businesses, always cross-check against free cash flow.