EV/EBITDA — the enterprise multiple

EV/EBITDA compares a company's total enterprise value to its EBITDA. It is the multiple professionals reach for when comparing businesses with different debt loads, because it values the whole enterprise rather than just the equity.

Enterprise value first

Enterprise value (EV) is what it would cost to buy the entire business — all the equity and assume all its debt, less the cash you would inherit.

EV = Market capitalization + Total debt - Cash

Worked example: market cap 3,000, debt 600, cash 200:

EV = 3,000 + 600 - 200 = 3,400

The multiple

EV/EBITDA = Enterprise value / EBITDA

With EBITDA of 330 from earlier:

EV/EBITDA = 3,400 / 330 = 10.3

You are paying about 10 times the core operating cash earnings to own the whole enterprise.

Why analysts prefer it to P/E

• Capital-structure neutral. Because EV includes debt and EBITDA is pre-interest, two companies with identical operations but different debt get comparable multiples — P/E would not.
• Better for cross-border comparison. EBITDA is pre-tax, so different national tax rates do not distort it.

Its limits

It inherits every flaw of EBITDA: it ignores capex and working-capital needs, so a capital-intensive business looks cheaper on EV/EBITDA than it really is. Pair it with free cash flow before concluding anything.