Valuation
EV/EBITDA
EV/EBITDA compares the whole firm's value with cash earnings before capital structure and non-cash charges.
P/E can be pushed around by debt, tax rates, and depreciation policy. EV/EBITDA steps up a level. Enterprise value is equity plus net debt, so two firms with the same operating profit and different balance sheets do not look identical. EBITDA is a rough stand-in for cash earnings before interest and tax. The multiple says how many years of that profit the whole firm is priced at.
It is the workhorse multiple for comparing companies that carry different debt loads, and for acquisitions, because a buyer takes on the debt. It is a poor fit for banks, where debt is the product, and it ignores real capital spending. A low EV/EBITDA on a business that must constantly rebuild factories can still be expensive on free cash flow.
Formula
EV/EBITDA = Enterprise value ÷ earnings before interest, tax, depreciation, and amortization
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Use the market cap as the equity piece of enterprise value. Add debt and subtract cash from the balance sheet before you trust an EV multiple.
Related
Enterprise Value · EBITDA · Free Cash Flow
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Questions
Why not just use P/E?
P/E ignores debt. A cheap P/E on a heavily borrowed firm can be an expensive EV/EBITDA. Use both.
What is a normal EV/EBITDA?
There is no universal normal. Capital-light software often trades richer than airlines or telecoms. Compare inside an industry.