EV/EBITDA compares enterprise value to earnings before interest, taxes, depreciation, and amortization, providing a debt-inclusive valuation metric.
The EV/EBITDA ratio is a comprehensive valuation metric that compares a company's total enterprise value (market cap plus debt minus cash) to its EBITDA. By using enterprise value instead of just market cap, it accounts for a company's debt load. By using EBITDA instead of net income, it excludes the effects of financing decisions and accounting policies, making it excellent for comparing companies with different capital structures.
Enterprise Value = Market Cap + Total Debt - Cash. If a company has $10B market cap, $2B debt, $1B cash, and $2B EBITDA: EV = $11B, so EV/EBITDA = 11 / 2 = 5.5x.
An EV/EBITDA above 15-20x suggests investors expect strong growth or the company operates in a high-margin sector. May indicate overvaluation.
An EV/EBITDA below 5-8x might indicate undervaluation, financial distress, or cyclical earnings at a peak.
Many analysts consider EV/EBITDA of 10-12x as reasonable for mature companies, though this varies significantly by industry.
