Why EV/EBITDA beats P/E for comparisons
Enterprise value is the price of the entire business: market capitalization plus debt, minus cash. Debt holders get paid before shareholders, so buying a leveraged company means taking on its borrowings too — EV captures that, while market cap alone does not.
EBITDA sits before interest, tax, depreciation and amortization, so it is not distorted by how a company is financed or by its accounting choices on depreciation. That is why EV/EBITDA is the standard multiple for acquisitions, and why a utility loaded with debt and a debt-free software company can finally be compared on the same basis.
The multiple is not universally good news at low values. Capital-intensive businesses that must keep reinvesting to maintain their asset base deserve a lower multiple than asset-light ones, because EBITDA overstates the cash actually available to owners. For those, check free cash flow conversion as well.
"Adjusted" EBITDA deserves scrutiny
Companies report EBITDA and then report adjusted EBITDA, and the gap between them is where discipline goes to die. Stock-based compensation is the most common add-back and the most consequential: it is a real cost that dilutes existing shareholders every year, and excluding it makes a business look more profitable than it is. When you use a multiple from a screen, find out which EBITDA produced it.
The honest test is to compare EBITDA against operating cash flow over several years. For a healthy business the two should track fairly closely, with the difference explained by tax, interest and working capital movements. When EBITDA keeps climbing while operating cash flow stays flat, the add-backs are doing the work, not the business.
Typical multiples by sector
These are rough ranges for developed markets, not targets — they exist to help you spot an outlier worth investigating.
- Utilities and regulated infrastructure: 7-10×. Stable, capital-heavy, high debt, limited growth.
- Mature industrials and consumer staples: 8-12×. The broad market middle.
- Healthcare and quality branded goods: 12-18×. Pricing power and defensible margins.
- Asset-light software and services: 18-30×. High incremental margins, minimal reinvestment needs.
- Commodity producers at mid-cycle: 4-7×. Low multiples reflect genuine cyclicality, not cheapness.
A company trading well outside its sector band is either mispriced or different from its peers in a way the multiple cannot see. Find out which before acting.
Net debt is where the traps hide
Enterprise value depends on net debt, and net debt is easy to understate. Operating leases sat off balance sheet for years before the accounting change; pension deficits and unfunded post-retirement obligations are liabilities that rarely appear in a quick net debt figure; convertible debt counts as debt until it converts. A company that looks cheap on a naive EV calculation may simply have more obligations than you counted.
Formula
EV = Market Cap + Total Debt − Cash · EV/EBITDA = Enterprise Value ÷ EBITDA
FAQ
What is a good EV/EBITDA multiple?
It depends on the sector and on how much reinvestment the business needs. Broad market averages sit near 10-12×, but asset-light software routinely trades above 20× while capital-heavy manufacturers trade at 6-8×. Compare within an industry, not against the index.
When should I use EV/EBITDA instead of P/E?
Whenever debt levels differ materially between the companies you are comparing, or when depreciation and amortization distort earnings — telecoms, infrastructure, industrials and anything that recently made a large acquisition. For banks and insurers, neither works; use price-to-book.
What does net debt do to the result?
A company with more cash than debt has negative net debt, so enterprise value is below market cap and the EV/EBITDA multiple comes out lower than a naive calculation. This is correct: the buyer gets that cash pile as part of the deal.
Is EBITDA the same as free cash flow?
No. EBITDA ignores taxes, interest and, critically, capital expenditure. Businesses that must spend heavily to maintain operations can show strong EBITDA and weak free cash flow, which is why EV/EBITDA looks cheaper than the business really is.
Related calculators
- P/E Ratio Calculator — multiple, earnings yield, PEG, target price
- EPS Calculator — basic and diluted earnings per share
- P/B Ratio Calculator — price against book value, with ROE context
More calculators
- Two-Stage DDM Calculator — high-growth then stable dividend valuation
- Margin of Safety Calculator — discount between value and price
- Compound Interest Calculator — future value with periodic contributions
- Reverse DCF Calculator — the growth rate today's price already assumes
- DuPont ROE Calculator — break return on equity into its three drivers
- Position Size Calculator — how many shares to buy for a set risk
- DCF Calculator — fair value from five years of cash flow plus terminal value
- Dividend Discount Model — Gordon Growth valuation for dividend payers
- CAGR Calculator — compound growth rate and forward projections
- Dividend Yield Calculator — yield, income per $10,000, capital needed
- Payout Ratio Calculator — dividend safety and sustainable growth
- Graham Number Calculator — Graham's maximum buy price
- Total Return Calculator — price change plus dividends, annualized
- WACC Calculator — weighted average cost of capital for discounting
Guides
- How to Value a Stock — the full valuation sequence, with a worked example
- Free Cash Flow Explained — the input every DCF depends on
- Margin of Safety Explained — why the discount is not optional
- Dividend Investing Guide — yield, payout ratio and dividend safety
- How to Read a Cash Flow Statement — three sections, eight combinations
- Intrinsic Value vs Market Price — why the two diverge, and how to behave
- How to Read a Balance Sheet — the asset side, and the four ways it misleads
- What Is a Good P/E Ratio? — the arithmetic behind a justified multiple
- Dividend Yield vs Total Return — why a high yield is not a high return
- How to Compare Two Stocks — a five-axis framework, worked side by side
- WACC Explained — the discount rate, built from five sourced inputs
- The DCF Method Explained — the forecast half of a DCF, and checking the terminal value
- The Graham Number Explained — Graham's ceiling tested on two companies, and what it cannot see