EV/EBITDA Basics
A capital-structure-neutral multiple; use within sector and mind capex. Education only.
The 10-second version
EV/EBITDA compares a company’s enterprise value (value of the entire business) to its EBITDA (earnings before interest, taxes, depreciation, and amortization). Because EV includes debt and cash, it is broadly neutral to capital structure and easier to compare across companies than P/E. Use it mainly within the same sector, normalize EBITDA, and always cross-check with capex and free cash flow.
Core idea in one line
EV/EBITDA tells you how many “EBITDAs” the whole business is worth—regardless of how it’s financed.
Definitions
- Enterprise Value (EV) ≈ Market Cap + Net Debt + Minority Interest + Preferred Equity − Non-operating Assets.
- EBITDA = EBIT + D&A, before interest and taxes; a proxy for operating cash earnings before capex and working capital.
“Net debt” = total debt − cash & cash equivalents. Include lease liabilities if you treat lease expense as financing.
Why it’s capital-structure-neutral
P/E mixes operating performance with financing (interest). EV/EBITDA removes interest and uses EV (which already adds debt/cash), so two firms with identical operations but different leverage should trade at similar EV/EBITDA. That makes it handy for comparable company and precedent transaction analysis.
How to compute (cleanly)
- Start with Equity Value: shares outstanding × share price.
- Add: total debt, preferreds, minority interest; subtract: cash & non-operating investments.
- Normalize EBITDA: remove one-offs (restructuring, gains/losses), ensure consistency (IFRS/Ind AS/US GAAP), and check if leases are in EBITDA or EV.
Worked toy example: Market cap ₹8,000cr; debt ₹3,000cr; cash ₹1,000cr → EV = 8,000 + 3,000 − 1,000 = ₹10,000cr. EBITDA (TTM, adjusted) = ₹1,250cr → EV/EBITDA = 8.0×.
How to use it (and where)
- Within sector: Capital intensity, growth, and accounting vary by industry; compare apples to apples.
- Screening: Flag outliers vs peers; cheap does not always mean good—investigate why.
- M&A context: Transactions quoted in EV/EBITDA help benchmark control premiums and synergies.
- Cycle-aware: Use mid-cycle or forward EBITDA for cyclical sectors; the trough can distort multiples.
Mind capex and free cash flow
EBITDA excludes maintenance capex. Two firms with equal EV/EBITDA can have very different free cash flow (FCF) if one needs heavy reinvestment (utilities, telecom, manufacturing) and the other doesn’t (asset-light software). Pair EV/EBITDA with EV/EBIT (after D&A), FCF yield, or EV/FCF to see the full picture.
Common adjustments
- Leases (IFRS 16): If you capitalize leases (add lease liabilities to EV), add back lease expense to EBITDA to keep apples-to-apples.
- Stock-based comp: Consider adding SBC back to EBITDA but treat it as an economic cost in valuation (dilution).
- One-offs: Remove non-recurring items (impairments, gains on asset sales, legal settlements).
- Associates/JVs: Exclude their EBITDA unless you add their value into EV.
Interpretation hints
- Lower multiple can imply cheaper, slower growth, higher risk, or under-earning margins.
- Higher multiple can reflect better growth, higher ROIC, stronger moat, or peak cycle profits.
- Compare vs peer median and your estimate of normalized EBITDA.
Pros & cons
| Pros | Cons | |
|---|---|---|
| Capital structure | Neutral; good for comps & M&A | Still sensitive to lease/accounting choices |
| Cash proxy | Before interest & taxes; simple | Ignores capex/working capital; can overstate cashiness |
| Cyclicality | Useful with normalized EBITDA | Misleading at peaks/troughs |
| Coverage | Works for many sectors | Poor fit for banks/insurers; negative EBITDA breaks it |
Pitfalls (avoid these)
- Comparing across unrelated sectors (capex and margins differ structurally).
- Ignoring maintenance capex—EBITDA is not FCF.
- Using unadjusted “headline” EBITDA loaded with one-offs.
- Forgetting leases: EV and EBITDA must treat leases consistently.
- Cherry-picking years in cyclical industries; use mid-cycle.
Quick comparison with other multiples
- P/E: Equity-only; sensitive to leverage and taxes; simpler but less comparable across capital structures.
- EV/EBIT: Penalizes asset-heaviness (D&A) and better mirrors maintenance capex over time.
- EV/FCF: Harder to compute but most meaningful when robust FCF history exists.
Five-minute checklist
- Have I built EV correctly (debt, cash, minorities, leases)?
- Is EBITDA adjusted for one-offs and aligned with the EV treatment of leases/JVs?
- Where is the firm in the cycle? Should I normalize/forward-look?
- What’s the capex/FCF profile vs peers?
- Am I comparing within the same sector and accounting framework?
Bottom line
EV/EBITDA is a powerful, capital-structure-neutral yardstick—great for comps and M&A—if you use it where it fits, normalize for one-offs, and keep an eye on capex and free cash flow. It’s a starting point, not a verdict.