EV/EBITDA Ratio

EV/EBITDA is a valuation multiple that compares a company's enterprise value to its earnings before interest, taxes, depreciation, and amortization. It's favored by investment professionals for its capital structure neutrality.

Formula:

EV/EBITDA = Enterprise Value / EBITDA

Example Calculation:

Component	Value
Enterprise Value	$120B
EBITDA	$10B
EV/EBITDA	12.0x

Interpretation:

EV/EBITDA	General Interpretation
< 8x	Potentially undervalued or distressed
8-12x	Fairly valued for mature companies
12-20x	Growth premium
> 20x	High-growth expectations or overvalued

Why EV/EBITDA Is Preferred Over P/E:

Factor	EV/EBITDA	P/E
Debt impact	Neutral	Affected
Depreciation	Excluded	Included
Tax differences	Excluded	Included
M&A analysis	Standard	Less useful
Capital intensive	Better	Less accurate

Industry Benchmarks:

Industry	Typical EV/EBITDA
Technology	15-25x
Healthcare	12-18x
Industrials	8-12x
Utilities	8-10x
Retail	6-10x

Use in M&A:

• Standard metric for acquisition analysis
• Easy to calculate purchase price implications
• Shows "years to pay back" via operating cash flow
• Comparable across different capital structures

Limitations:

• EBITDA ≠ cash flow (ignores CapEx, working capital)
• Companies with high CapEx needs can look cheap
• Doesn't account for growth rates
• Can be manipulated via accounting choices

EV/EBITDA vs. Other Multiples:

Multiple	Best For
EV/EBITDA	Capital-intensive, M&A
P/E	Profitable, stable companies
P/S	Unprofitable growth companies
EV/Revenue	Early-stage, no EBITDA