What is EV/EBITDA?
In short
Enterprise value (market cap + debt − cash) ÷ earnings before interest, tax, depreciation and amortisation. Lets you compare companies with different debt and cash.
Also known as: enterprise value, EV, EBITDA
EV/EBITDA compares a company's total value (EV) with its earnings before interest, tax, depreciation and amortisation (EBITDA). It is used to compare companies with different amounts of debt and cash on one yardstick.
EV (enterprise value) = Market cap + Debt − Cash
EBITDA = Operating income + Depreciation and amortisation (D&A)
How it differs from P/E
P/E looks only at the shares and ignores debt. A buyer acquiring the whole company, however, takes on its debt and also gets its cash — EV is exactly that "full price". EBITDA is independent of debt and tax structure, so the two parts match each other.
Where it is used
Comparing companies with heavy debt or large cash piles, valuing acquisitions (M&A), and in capital-intensive industries (telecom, energy, industrials).
Limitations
EBITDA is not cash. It ignores capex, the cost of keeping equipment up to date: for a company that constantly pours money into plants or networks, a low EV/EBITDA can be misleading. Companies sometimes strip lots of costs out of "adjusted EBITDA" — check the definition.
Market cap is $500m (10m shares × $50). EV = $500m + $10m debt − $40m cash = $470m. Each number answers its own question.
Example
Two hypothetical companies with the same market cap — $10 billion:
A: debt $4B, cash $1B → EV = 10 + 4 − 1 = $13B. Operating income $0.9B + D&A $0.4B = EBITDA $1.3B → EV/EBITDA = 13 ÷ 1.3 = 10.
B: no debt, cash $3B → EV = 10 + 0 − 3 = $7B. EBITDA $1.0B → EV/EBITDA = 7.
By market cap they cost the same, but once debt and cash are counted, B is noticeably cheaper: you pay less and get a debt-free business.
Mistakes and tips
Compare EV/EBITDA only among companies in the same industry.
In capital-intensive businesses, look at capex and free cash flow alongside EBITDA.
Check what has been stripped out of "adjusted EBITDA" — especially if stock-based pay and "one-off" costs recur every year.
Frequently asked questions
- What is a good EV/EBITDA?
- There is no universal number: it depends on the industry, growth rate and interest rates. The right approach is to compare a company with its peers and its own history.
- What is the difference between EV and market cap?
- Market cap is just the value of the shares. EV adds debt and subtracts cash — so it is closer to the price of buying the whole business.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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