EV/EBITDA

EV/EBITDA values a whole business (debt included) against its core earnings, for cleaner cross-firm comparison.

Using it in practice

Use EV/EBITDA for comparing capital-intensive firms and for spotting cheap whole businesses. Pair it with free cash flow, because EBITDA ignores the cash needed to maintain assets.

Where people go wrong

Like EBITDA, it can flatter firms with heavy upkeep costs.

Example in numbers

Why investors care

It neutralises capital structure so you compare operating value, not financing.

In the real market

Two cable companies have identical EBITDA of $1 billion. One carries $5 billion of debt, the other $1 billion, so their market caps differ even though operations match. A P/E comparison makes the indebted firm look cheaper; EV/EBITDA reveals they are actually similar businesses with different financing. A private-equity buyer uses EV/EBITDA precisely because the multiple adds the debt back — the price of the whole enterprise, not just the equity slice.

Key takeaway

EV/EBITDA values the whole enterprise — debt and cash included — against core earnings, which makes it the cleanest cross-firm comparison and the default in takeovers. Because it adds debt back, it lets you compare a leveraged firm and a cash-rich one on equal terms. The weakness is EBITDA itself: it ignores the cash needed to maintain assets, so pair the multiple with free cash flow. The multiple prices the business; the cash flow proves it can pay.

Definitions reviewed by the Investing Glossary editorial team.