July 15, 2025
4 mins read
EV/EBITDA is a financial ratio that compares a company’s total value (known as Enterprise Value or EV) to the earnings it generates before paying interest or taxes and before accounting for depreciation and amortisation (EBITDA). It’s a popular tool that helps investors and analysts gauge how fairly a company is valued in the market. Read on as we discuss all about what is EV EBITDA.
This ratio tells you how many times a company's EBITDA you'd have to pay if you were to buy the whole business. In simple terms, it helps you understand whether a stock is expensive or cheap in relation to how much profit it generates from its core operations.
Because it eliminates the effects of varying debt levels and accounting methods, EV/EBITDA is useful for comparing companies across different industries or with varying financial structures.
EV/EBITDA is widely used for a few key reasons:
It provides a clearer picture of a company’s value than just examining its profits.
It’s especially helpful when comparing companies in the same sector.
EV/EBITDA Ratio is often used in:
Valuation analysis (e.g., “Company A trades at 7x EV/EBITDA”)
M&A deals to decide on the acquisition price
Equity research to estimate a stock’s target price
Calculating terminal value in financial models like DCF
Like any financial metric, EV/EBITDA has its strengths and weaknesses. Whether it's the right tool to use depends on the specific context.
Simple to calculate: The data needed is easy to find from public financial statements.
Widely accepted: It’s a common benchmark used by analysts, investors, and bankers.
Great for comparing companies: Especially useful when comparing businesses in the same industry, as it removes the impact of different capital structures.
Ideal for mature businesses: It works well for companies with steady earnings and low capital spending.
Focuses on core operations: Since it ignores interest, taxes, and non-cash items, it gives a clearer view of a company’s operational performance.
Ignores future growth: It doesn’t factor in how fast a company is expected to grow or the conditions of the market it operates in.
Can be skewed by one-off events: Temporary changes like new accounting rules or shifts in interest rates can affect the ratio.
Not suitable for all businesses: It may not give a fair picture for companies with large non-cash costs or erratic earnings.
Overlooks capital expenses: It doesn’t account for how much a company spends on assets, which affects cash flow.
Hard to compare growth premiums: Differences in valuation (why one company is valued higher or lower than another) can be hard to explain with this ratio alone.
Cash flow may be misrepresented: Since EBITDA is not actual cash flow, relying on it can sometimes be misleading.
One of the very effective ways to understand how EV/EBITDA works is to roll up your sleeves and try calculating it on your own. Follow these steps to calculate EV/EBITDA ratios and value a company using real-world data:
Pick a sector you're interested in, for example, the beverage industry.
Identify 5 to 10 companies that operate in a similar space and seem like good comparisons.
Remove companies that are too different, maybe they’re much bigger, focus on different products, or operate in totally different regions.
Gather financial data for the past 3 years, look for revenue, gross profit, EBITDA, and earnings per share (EPS).
Find each company’s latest share price, total shares outstanding, and net debt.
Use the formula:
EV = Market Cap + Net Debt
(Market Cap = Share Price × Shares Outstanding)
For each of the 3 years, divide EV by the EBITDA to get the EV/EBITDA multiple.
Look at how each company's EV/EBITDA multiple stacks up against the others.
Try to figure out why some companies trade at higher (premium) or lower (discounted) multiples, is it because of growth, stability, or brand strength?
Based on your findings, decide what EV/EBITDA multiple seems fair for the company you’re trying to value.
An EV/EBITDA calculator is a handy tool for investors and analysts who want to quickly assess a company’s valuation. It calculates the EV/EBITDA ratio by using details like the company’s market value, debt, preferred shares, minority interest, and EBITDA.
By dividing Enterprise Value (EV) by EBITDA, the calculator shows how much investors are paying for every rupee or dollar of operating profit the company generates. Some calculators also let users compare this ratio with industry averages or adjust it based on assumptions like market trends or expected growth.
The enterprise multiple, another name for the EV/EBITDA ratio, gives valuable insights into a company's worth and financial health. A higher ratio indicates that investors expect strong future growth or believe the company holds a competitive edge in the market. On the other hand, a lower ratio could suggest the company is undervalued or facing challenges.
EV/EBITDA is a go-to metric for evaluating the value a company offers in relation to the profits it generates from its core operations. Because it smooths out differences in debt and accounting practices, it's a great tool for comparing companies and making smarter investment decisions. However, it’s not perfect. It can work well ideally when used alongside other financial metrics, especially while comparing businesses within an industry.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities.
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EV/EBITDA is often preferred because it removes the effects of taxes, interest, and accounting decisions. It offers a clearer view of a company’s core performance, especially when comparing companies with different capital structures or in different countries.
A “good” EV/EBITDA ratio depends on the industry, but generally, a range between 6 and 10 is considered reasonable. Lower values may suggest undervaluation, while higher ones could reflect strong growth expectations or potential overvaluation.
Different industries have different average EV/EBITDA ratios. For example, tech and biotech companies often have higher multiples due to growth potential, while capital-intensive sectors like utilities or manufacturing tend to have lower ratios because of slower growth.
Yes, EV/EBITDA can be negative if a company’s EBITDA is negative. This usually signals financial trouble, losses from core operations, or early-stage businesses that haven’t yet become profitable. It’s a red flag for investors to investigate further.
Investors use EV/EBITDA to compare a company’s value with its operating earnings. It helps them judge whether a stock is overvalued or undervalued, especially when comparing it with peers in the same sector or industry benchmark multiples.
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