EV/EBITDA

Enterprise Value divided by EBITDA; a capital-structure-neutral valuation multiple.

EV/EBITDA is a valuation metric used to compare the value of a company, inclusive of its debt, to its earnings before interest, taxes, depreciation, and amortization. By using Enterprise Value (EV) instead of market capitalization, the metric accounts for a company's debt and cash levels. By using EBITDA, it focuses on core operating profitability before the effects of capital structure, tax jurisdictions, and non-cash accounting decisions. This makes it a highly popular tool for comparing companies with different levels of leverage or different depreciation policies. To calculate the ratio, an investor divides the company's enterprise value (market cap plus total debt minus cash and cash equivalents) by its EBITDA over a given period, typically the trailing twelve months (TTM) or a forward-looking fiscal year. Because it strips out the cost of debt financing, it allows for a cleaner comparison between highly leveraged companies and those funded primarily by equity. Investors generally look for lower EV/EBITDA multiples relative to industry peers or historical averages as a sign of potential undervaluation. However, a low multiple can sometimes indicate underlying business distress or declining growth prospects. A major pitfall of this metric is that it ignores capital expenditures (CapEx). For capital-intensive industries, a company might look cheap on an EV/EBITDA basis while actually consuming massive amounts of cash to maintain its physical assets.

Company A has a market capitalization of $100 million, $30 million in total debt, and $10 million in cash, giving it an Enterprise Value (EV) of $120 million ($100M + $30M - $10M). If Company A reports an annual EBITDA of $15 million, its EV/EBITDA multiple is calculated as $120 million / $15 million = 8.0x.