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Financial Context Wiki

EV/EBITDA: Enterprise Value Divided by EBITDA

For educational purposes only; not investment advice.

Direct answer

Section titled “Direct answer”

EV/EBITDA compares a company’s enterprise value with its earnings before interest, taxes, depreciation, and amortization.

EV/EBITDA = enterprise value ÷ EBITDA

The ratio is often used for businesses where debt levels, tax rates, depreciation policies, or acquisition financing can make price-to-earnings comparisons less clean.

How it works

Section titled “How it works”

Enterprise value starts with market capitalization, then adds debt and similar claims, and subtracts cash. EBITDA is an operating earnings measure before financing costs, taxes, depreciation, and amortization. Pairing the two keeps the numerator and denominator closer to the same enterprise-level view.

The multiple is most useful when companies have comparable business models, accounting policies, lease treatment, capital intensity, and cyclicality. Analysts often use trailing twelve-month EBITDA, forward estimated EBITDA, or normalized EBITDA; those choices can produce very different answers.

Because EBITDA is frequently presented as a non-GAAP measure, the reconciliation to GAAP results should be checked. Repeated adjustments, stock-based compensation, restructuring costs, and acquisition costs can change the meaning of the denominator.

Example

Section titled “Example”

A company has a market capitalization of $10 billion, debt of $3 billion, and cash of $1 billion.

EV = $10B + $3B - $1B = $12B

If its trailing twelve-month EBITDA is $1.2 billion:

EV/EBITDA = $12B ÷ $1.2B = 10.0x

That 10.0x multiple is not a verdict by itself. It should be compared with similar companies, the company’s own history, expected growth, margins, capital expenditure needs, balance-sheet risk, and the quality of EBITDA adjustments.

Risks

Section titled “Risks”
  • Capital expenditure is hidden: EBITDA adds back depreciation, but asset replacement may still require cash.
  • Debt quality matters: Two companies can have the same multiple but very different maturity schedules and refinancing risk.
  • Cyclical peak risk: EBITDA near the top of a cycle can make the multiple look artificially low.
  • Adjustment risk: Company-defined adjusted EBITDA may exclude costs that recur in practice.
  • Sector mismatch: Banks and insurers usually need different valuation methods because debt is part of operations.

Common misconceptions

Section titled “Common misconceptions”

Low EV/EBITDA does not automatically mean a stock is cheap.

EV/EBITDA is not a cash-flow multiple unless maintenance capital expenditure, working capital, and taxes are analyzed separately.

The ratio is not directly comparable when one company capitalizes costs, leases heavily, carries restricted cash, or reports aggressive adjustments while peers do not.

Section titled “Related topics”

Sources

Section titled “Sources”
  • SEC: financial-statement, 10-K, and non-GAAP measure guidance.