Valuation

EV/EBITDA (Enterprise Value Multiple)

Enterprise Value to EBITDA

At a glance

How many times EBITDA the enterprise value (EV) is — a valuation multiple that assesses a company including its debt.

EV/EBITDA = Enterprise Value (EV) ÷ EBITDA

A low EV/EBITDA means the company is valued low relative to its cash-generating power; a high one means that value is high or expectations for future growth are large.

In plain terms

Think of a company as a shop. If you buy the whole shop, you don't just pay the price of the shop — you also take on the debt it carries. EV/EBITDA looks at a company at that whole-purchase price.

While PER looks only at the price of the stock, this one uses the value of the entire company including debt (enterprise value, EV) as its basis.

That value is divided by EBITDA. It shows how many times the core business's cash-like earnings the whole company's value amounts to.

Buying the whole company costs how many years of cash profit

Cost of buying the whole company$25M

Divide it by the cash-like profit the core business makes in a year

Cash-like profit in one year$2.5M

year 1 · $2.5Myear 10 · $25M

모두 10칸

EV/EBITDA of 10

Taking on the debt and buying it whole, the core cash flow covers the price in ten years.

P/E looks only at the shares; this takes the debt in too, because buying a company means taking on its debt.

EBITDA leaves out the wearing down of equipment. For a company that must keep pouring money into plant and machinery, these cells look larger than what is really left.

The figures belong to a made-up company, Example Inc. Every picture in this glossary uses the same company, so you can see how the metrics connect.

What it tells you

You can compare companies with different debt structures on the same yardstick. PER makes it hard to compare a heavily indebted company with a lightly indebted one on equal terms, whereas EV/EBITDA includes debt in the enterprise value (EV) and bridges that gap.

It's one of the most widely used yardsticks in M&A deals where whole companies change hands, so it's handy for gauging "what level is the price if I buy this company outright."

Formula

EV/EBITDA = Enterprise Value (EV) ÷ EBITDA
Enterprise Value (EV) = Market cap + Net debt (total debt − cash on hand)
EBITDA = Operating income + Depreciation and amortization

What high or low means

A low EV/EBITDA means the company is valued low relative to its cash-generating power; a high one means that value is high or expectations for future growth are large.

Normal levels differ greatly by industry, so this multiple can't be compared across different industries. If the company is in the red and EBITDA is negative, the multiple has no meaning.

Caution

EBITDA is calculated by excluding depreciation, so it hides the real costs of companies that must keep pouring money into equipment (telecom, manufacturing, airlines). Looking at EBITDA alone may look fine, but cash keeps going out to maintain facilities, so EBITDA and actual cash flow are different figures (a point Warren Buffett also warned about).

So in capital-intensive industries, even when EV/EBITDA looks low, actual free cash flow (FCF) can be thin. It's safer to look at it together with FCF.

Depending on how net debt is counted (whether leases and preferred stock are included), the enterprise value (EV) calculation can vary somewhat.

Story

In 1988, the private equity firm KKR acquired the food and tobacco company RJR Nabisco for about 25 billion dollars. It was the largest leveraged buyout (LBO) ever at the time, and became famous through the book and film "Barbarians at the Gate."

In such an LBO, the key yardstick for judging the purchase price is exactly EV/EBITDA. Since it's a deal that takes on heavy debt to buy an entire company, it compares enterprise value (EV), which includes debt, against EBITDA, the cash-like earnings of the core business, rather than PER, which looks only at the stock. It's a representative case showing why EV/EBITDA is "the yardstick for buying a company outright."

Metrics to read alongside

PER (Price-to-Earnings Ratio)

PER looks only at the stock, while EV/EBITDA looks at the whole company including debt. Looking at both shows how the assessment changes when debt is included versus excluded.

Net Debt to EBITDA

Looking together at how large the net debt in EV/EBITDA is relative to EBITDA (net debt/EBITDA) lets you also gauge the company's debt burden.

FCF (Free Cash Flow)

Because EBITDA doesn't subtract capital spending, it can make cash flow look better. Looking together at the cash actually left over (FCF) removes that illusion.

See it in real stocks

Search US stocks on Stocklore to see EV/EBITDA alongside the sector benchmark.

AMAT Applied Materials, Inc.ABBV AbbVie Inc.AMT American Tower Corporation DELL Dell Technologies Inc.ABNB Airbnb, Inc.EXEL Exelixis Inc Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.