EV/EBITDA

EV/EBITDA values a whole company, debt included, against its operating cash earnings. How enterprise value works and when to use it over P/E.

Enterprise value

Market cap is the price of the shares. Enterprise value (EV) is the price of the whole business: what it would cost to buy every share, take on the debt, and keep the cash.

EV = market cap + total debt - cash

Two companies with the same market cap can have very different EVs if one carries a lot of debt.

EBITDA

EBITDA is earnings before interest, taxes, depreciation and amortization. It approximates the cash profit of the operations before financing and accounting choices. It is close to operating income with depreciation added back.

The ratio

EV/EBITDA says how many years of operating earnings it would take to pay for the whole business. Lower is cheaper.

EV/EBITDA Rough reading
Below 8 Cheap, or a slow or cyclical business
8 to 15 Typical for mature companies
Above 20 Priced for strong growth

When to use it instead of P/E

  • Different debt levels: P/E ignores debt; EV/EBITDA includes it.
  • Heavy depreciation: capital-intensive companies (telecoms, manufacturers) look worse on P/E.
  • Acquisitions: buyers of whole companies think in EV terms.

Caveats

EBITDA ignores capital spending. A company that must constantly replace expensive equipment can look cheap on EV/EBITDA while generating little Free cash flow. Warren Buffett's quip: "Does management think the tooth fairy pays for capital expenditures?"

See also

  • P/E ratio (price-to-earnings) What the P/E ratio means, trailing versus forward P/E, what counts as high or low, and why P/E alone can mislead without growth.
  • Operating margin Operating margin measures profit from the core business before interest and tax. How it differs from gross and net margin and how to use it.
  • Market capitalization Market cap is the total value of a company's shares. The size categories, how market cap compares with enterprise value, and market cap versus potential.
  • Price-to-sales ratio (P/S) The price-to-sales ratio values a company against its revenue. Why it is useful for unprofitable growth companies, and why margins matter to read it.

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Last updated September 30, 2026. Education only, not investment advice.