EV/EBITDA

The EV/EBITDA ratio (Enterprise Value-to-EBITDA) divides a company's enterprise value by its EBITDA (earnings before interest, taxes, depreciation, and amortization). It's a capital-structure-neutral valuation metric widely used for company comparisons and M&A valuations.

Formula

EV/EBITDA = Enterprise Value ÷ EBITDA

Enterprise Value = Market Cap + Total Debt - Cash

EBITDA is operating profit before D&A.

Example

Apple (AAPL) with a market cap of $3 trillion, $100 billion in debt, $50 billion cash, and EBITDA of $150 billion has an EV/EBITDA of (3T + 100B - 50B) / 150B = 20.3x. Microsoft (MSFT) might have EV/EBITDA of 25x, suggesting MSFT is valued at a premium.

How to Interpret It

• Lower EV/EBITDA (8-12x): Potentially undervalued, often mature or declining businesses.
• Moderate EV/EBITDA (12-20x): Fair valuation, typical for stable, profitable companies.
• Higher EV/EBITDA (20x+): Premium valuation, often high-growth companies or strong competitive advantages.
• Industry comparison: Compare EV/EBITDA to peers and industry averages; tech might average 20x, utilities 10x, retail 8x.
• Rising EV/EBITDA: Investors are paying more per dollar of EBITDA, often signaling growth expectations rising.

Limitations

• EV/EBITDA ignores capex; capital-intensive businesses might have high EBITDA but low free cash flow, making EV/EBITDA misleading.
• EBITDA can be manipulated by excluding one-time items or changing accounting estimates; adjust for exceptional items.
• Different debt levels and tax rates between companies are normalized, but off-balance-sheet liabilities (leases, pensions) aren't fully captured.
• EV/EBITDA works best for profitable, mature companies; less useful for loss-making startups or highly cyclical businesses.

Related Terms

• Enterprise Value — total value of a company including debt
• EBITDA — operating profit before D&A
• P/E Ratio — a simpler, more basic valuation metric
• Free Cash Flow — actual cash available after capex