EV/EBITDA (Enterprise Value to EBITDA)
How many times EBITDA the enterprise value (EV) is — a valuation multiple that values the company including its debt.
In plain terms
If PER values a company by looking only at its stock, EV/EBITDA values it the way you would when acquiring the whole company — on the basis of its full value including debt (enterprise value, EV).
EBITDA adds depreciation (the cost charged as plant and equipment age — no actual cash leaves) back to operating income. Think of it as an earnings yardstick close to the cash the core business generates. So EV/EBITDA asks "how many times the core business's cash-like earnings is the whole company worth."
What it tells you
It lets you compare companies with very different debt structures on the same yardstick. PER struggles to fairly compare a heavily indebted company with a lightly indebted one, but EV/EBITDA folds the debt into enterprise value (EV) and closes that gap.
It is one of the most common yardsticks in M&A, so it is useful for gauging "is this company expensive to buy outright."
Formula
EV/EBITDA = enterprise value (EV) ÷ EBITDA Enterprise value (EV) = market cap + net debt (total debt − cash on hand) EBITDA = operating income + depreciation & amortization
What high or low means
A low EV/EBITDA can mean the stock is cheap relative to its cash-generating power; a high one means it is expensive or carries big growth expectations.
Normal levels vary widely by industry, so always compare within the same industry. With a loss and negative EBITDA, the multiple is meaningless.
EBITDA leaves out depreciation, so it hides the real costs of companies that must keep pouring money into equipment (telecom, manufacturing, airlines). It can look good on EBITDA alone while cash keeps draining into maintaining equipment — never mistake "EBITDA for cash flow" (a point Warren Buffett warned about too).
So in capital-intensive industries, even a low-looking EV/EBITDA can sit on thin actual free cash flow (FCF). It is safer to read it with FCF.
How you count net debt (whether to include leases and preferred stock) can shift the enterprise value (EV) calculation slightly.
In 1988, private-equity firm KKR acquired food and tobacco company RJR Nabisco for about $25 billion. It was the largest leveraged buyout (LBO) in history at the time, made famous by the book and film "Barbarians at the Gate."
In an LBO like this, the key yardstick for the purchase price is EV/EBITDA. Because it is a deal that buys the whole company with piles of debt, you measure enterprise value (EV) including debt — not stock-only PER — against the core business's cash-like earnings, EBITDA. It is the classic example of why EV/EBITDA is "the yardstick for buying a company outright."
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see EV/EBITDA and other financial metrics alongside the sector average.
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.