EV/EBITDA.
In plain English
EV/EBITDA divides enterprise value, which is market capitalization plus net debt, by earnings before interest, taxes, depreciation, and amortization. Both halves ignore the capital structure, so the multiple compares operating businesses rather than the mix of debt and equity that funds them. That makes it a standard tool when comparing a debt-heavy company to a debt-free one, and in deal work where the buyer takes on the debt. Its weakness is EBITDA itself, which ignores the real cost of replacing equipment. Capital-hungry businesses look better on this measure than they deserve to.
01Why it matters
A P/E can make a debt-loaded company look cheap because interest has already been subtracted, and this multiple closes that gap by pricing the debt and the equity together.
02The math, step by step
Market capitalization is $4 billion, debt is $1.5 billion, cash is $500 million, so enterprise value is $5 billion. EBITDA is $625 million. $5 billion divided by $625 million is an EV/EBITDA of 8.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
P/E looks only at the equity slice and at profit after interest and tax. EV/EBITDA covers the entire capital structure and stops above interest, tax, and depreciation. Two companies can rank in opposite order on the two measures.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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