EV/EBITDA compares a company’s enterprise value— the cost of buying the entire business, debt included — to its EBITDA, earnings before interest, taxes, depreciation and amortisation. Where the P/E ratio looks only at what equity holders pay for net profit, EV/EBITDA asks what an acquirer would pay for the whole enterprise relative to its operating cash earnings.
Because it puts debt and equity on the same footing, it lets you compare companies that finance themselves very differently — which is why it is a staple of mergers, acquisitions and cross-company valuation.
Enterprise value itself is EV = Market Cap + Total Debt − Cash & Equivalents — what you would pay for the equity, plus the debt you take on, less the cash you get with it.
Suppose a company has a market cap of $8,000M, $2,000M of debt and $500M of cash. Its enterprise value is $8,000M + $2,000M − $500M = $9,500M. With EBITDA of $1,000M:
The market is valuing the whole enterprise at 9.5 times its annual operating cash earnings — a figure you can line up directly against peers regardless of how much debt each one carries.
Use EV/EBITDA to compare companies with different debt loads, where P/E would be distorted by interest costs. It is especially common in capital-intensive sectors and in M&A, where the buyer assumes the target’s debt.
As with any multiple, judge it against sector peers and the company’s own history rather than in isolation — a lower multiple can signal value, or a market that expects earnings to shrink.
It matters most when comparing firms with very different leverage, or when net income is distorted by heavy depreciation, amortisation or interest — situations where the P/E ratio can mislead but operating cash earnings still tell a clean story.
EBITDA deliberately ignores capital expenditure and changes in working capital, so it is not the same as cash flow — the famous warning that “EBITDA is not cash”. That can flatter capital-heavy businesses whose real cash generation is far lower once reinvestment is counted. It also says nothing about the quality or durability of those earnings.