EV/EBITDA: What It Is, How to Calculate It and When to Use It

What Is EV/EBITDA?

EV/EBITDA is a valuation multiple that compares a company's enterprise value (EV) to its earnings before interest, tax, depreciation, and amortisation (EBITDA). It answers the question: how many years of EBITDA would you need to pay back the enterprise value of the business?

How to Calculate It

Enterprise Value = Market Capitalisation + Total Debt - Cash and Cash Equivalents + Minority Interest + Preferred Shares. Using EV rather than market cap removes the effect of capital structure — a company with lots of debt and one with no debt can be compared on the same basis. EBITDA = Operating Profit + Depreciation + Amortisation. EBITDA is a proxy for operating cash generation before the effects of financing, tax, and accounting policy choices on depreciation.

What Does the Multiple Tell You?

A higher EV/EBITDA multiple implies the market is pricing in higher growth, lower risk, or both. Fast-growing technology companies typically trade at 20-30x or higher. Mature, capital-light businesses in stable sectors trade at 8-12x. Capital-intensive businesses with significant debt trade at lower multiples. The multiple is most useful when comparing companies within the same sector — cross-sector comparisons can be misleading.

When EV/EBITDA Works Well

EV/EBITDA is particularly useful for comparing companies with different capital structures (debt levels), different depreciation policies, or different tax rates — since all of these are stripped out before the EBITDA line. It is the most common multiple used in M&A deal pricing, leveraged finance, and private equity transactions.

Limitations

EBITDA ignores capex — a capital-intensive business that must spend heavily to maintain its asset base has much lower free cash flow than its EBITDA implies. EV/EBITDA also ignores working capital requirements. For capital-intensive industries (mining, manufacturing, telecoms), EV/EBIT or EV/EBITDA minus capex are often more meaningful. Reconciling EV/EBITDA with DCF analysis provides a more complete picture. This concept is examined in ACCA AFM and in CIMA Strategic level case studies.