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EV/EBITDA

In short

Enterprise Value to EBITDA — values the whole business including debt

Like P/E but for the entire company including its debt. A company with lots of debt looks cheap on P/E but expensive on EV/EBITDA — this ratio tells the full story.

EV/EBITDA compares total enterprise value (market cap + debt - cash) to earnings before interest, taxes, depreciation, and amortization. It's capital-structure neutral, making it better for comparing companies with different debt levels.

Formula

EV/EBITDA = (Market Cap + Debt - Cash) ÷ EBITDA

Thresholds

<8
Cheap — investigate why
8-15
Fair value
15-25
Growth premium
>25
Very expensive

Related concepts

  • P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
  • Enterprise Value — Market cap tells you what the equity is worth. Enterprise value tells you what the WHOLE company is worth, including what it owes (debt) minus what it holds in cash. If a company has a $10B market cap, $3B of debt, and $1B of cash, its EV is $12B — the closer estimate of a true acquisition price.
  • Debt-to-Equity Ratio — If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.