EV/EBITDA: what it is and how to value a company with it

EV/EBITDA compares a company’s total value (Enterprise Value) with its operating profit before depreciation and amortization (EBITDA). It is a favourite multiple among analysts and funds because it lets you compare companies with different debt structures and depreciation loads.

What Enterprise Value is

Enterprise Value (EV) is what it would cost to buy the whole company: its market capitalization plus net debt. Unlike the share price, EV accounts for debt, so it better reflects the real cost of acquiring the business.

Why it sometimes beats the P/E

The P/E is based on net income, which is affected by taxes, interest on debt and accounting depreciation. EV/EBITDA neutralizes those effects and lets you compare apples with apples, especially across capital-intensive or heavily indebted companies.

How to read it

• The lower it is, the cheaper the company looks relative to its operating profit.
• An EV/EBITDA below 8-10 is often considered attractive, but it depends heavily on the sector.
• Always compare it with peers in the same sector and with its own historical average.
• A very low multiple can hide problems: always check why it is cheap.