Definition
EV/EBITDA
EV/EBITDA compares a company's enterprise value to its earnings before interest, tax, depreciation, and amortisation, a capital-structure-neutral valuation measure.
Enterprise Value (EV) is market cap plus net debt; EBITDA is operating profit before non-cash and financing items. EV/EBITDA shows how many years of operating cash earnings the whole business (debt + equity) is valued at, making it useful for comparing companies with different debt levels.
Unlike P/E, it isn't distorted by interest costs or depreciation policies, so it's favoured for capital-intensive sectors (cement, telecom, infrastructure) and for comparing acquisition targets. A lower EV/EBITDA generally suggests a cheaper valuation, all else equal.
Related terms
- Price-to-Book (P/B) RatioThe P/B ratio compares a company's market price to its book value (net assets) per share, showing how much investors pay for each rupee of net worth.
- Debt-to-Equity RatioThe debt-to-equity ratio compares a company's total borrowings to its shareholders' equity, gauging how leveraged (and risky) its balance sheet is.
- Free Cash FlowFree cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.