What Is EV/EBITDA?
EV/EBITDA compares what a whole company costs, including its debt, with what its core business earns. It is one of the most popular ways professionals compare company values.
How to calculate it
A company has an enterprise value of $120 billion and EBITDA of $12 billion. Its EV/EBITDA is 10.
Why use it instead of P/E?
The P/E ratio is affected by debt and taxes. EV/EBITDA includes debt in the price and leaves interest and taxes out of the earnings. That makes it fairer for comparing companies with very different amounts of debt.
What is a good EV/EBITDA?
Many mature companies trade somewhere around 8 to 14. Lower can mean cheap, or a business in trouble. Higher often means investors expect strong growth. Always compare with similar companies.
The catch
EBITDA ignores the cost of replacing equipment. For businesses that must spend a lot on capital expenditure, EV/EBITDA can make them look cheaper than they are.
See it in real companies
Open a company to see what it sells and how it makes money.