P/E compares the stock price to earnings — but it ignores debt. Two businesses with identical operations but different capital structures will have different P/E ratios, making direct comparison misleading. EV/EBITDA solves this by measuring the whole enterprise, not just the equity.
The formula
Enterprise Value (EV) = Market Capitalisation + Net Debt (Total Debt − Cash). EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortisation. EV/EBITDA = EV ÷ EBITDA. If a company has a market cap of $500m, net debt of $200m, and EBITDA of $70m, its EV is $700m and EV/EBITDA is 10×.
Why enterprise value, not market cap
When a private equity firm buys a company, it takes on the debt too. The acquirer's true cost is the equity price plus the debt it inherits. EV reflects this: it's the theoretical acquisition price you'd have to pay to own the entire business free and clear.
This makes EV/EBITDA the natural language for M&A analysis — and useful for investors because it strips out differences in how companies are financed. A highly leveraged company and a debt-free company with identical operations will have very different P/E ratios, but their EV/EBITDA should converge.
Why EBITDA, not earnings
EBITDA adds back interest (to neutralise capital structure), taxes (vary by jurisdiction and structure), depreciation and amortisation (non-cash charges that vary by asset base). The result is a rough proxy for operating cash flow — comparable across companies regardless of their financing, tax situation, or accounting treatment of assets.
The key limitation: EBITDA ignores capex
Adding back depreciation is only valid if you believe the assets don't actually wear out and need replacing. For a software company, this is largely true. For an airline, a pipeline operator, or a steel mill, depreciation is a very real cost — the physical assets do degrade and must eventually be replaced. For capital-intensive businesses, EV/EBIT (keeping depreciation in) or EV/FCF is more honest.
| Business type | Preferred metric |
|---|---|
| Asset-light (software, consumer brands) | EV/EBITDA works well |
| Moderate capex (industrials, healthcare) | EV/EBITDA as a starting point, verify with EV/EBIT |
| Capital-intensive (mining, airlines, utilities) | EV/EBIT or EV/FCF preferred |
Interpreting the historical chart
The chart plots the stock's EV/EBITDA over time. The shaded band is the 25th–75th percentile range. A reading below the band suggests the market is placing an unusually low acquisition-equivalent multiple on the business's operating earnings — often worth examining as a potential value opportunity. Rising EV/EBITDA over time, accompanied by rising margins and EBITDA growth, is healthy. Rising multiple without EBITDA growth is multiple expansion — a riskier situation.
Each stock page shows EV/EBITDA with its full historical percentile context. Use it alongside P/E and P/B to build a more complete valuation picture.
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