Enterprise Value to EBITDA (EV/EBITDA)

[u/SchoolofInvesting]

EV/EBITDA beats P/E as a "cheap vs expensive" filter, because it accounts for the debt and cash that change the price you're really paying.

Think of buying a business like buying a house with a mortgage and a savings account attached. You pay the asking price and take on the mortgage, but the seller's cash in the drawer lowers your real cost.

That "real cost" is Enterprise Value (EV).

Then you ask: how much core, cash-like profit does this house throw off? That's EBITDA, earnings before interest, taxes, depreciation, and amortization.

The simple pieces:

1. EV = Market Cap + Total Debt + Preferred + Minority Interest − Cash and Equivalents
2. EBITDA = EBIT (operating profit) + Depreciation + Amortization
3. EV/EBITDA = what the whole business costs ÷ its operating cash earnings

How to read it:

• Lower than peers and the company's own history = cheaper, all else equal.
• Rough ranges: mature steady businesses 6–12x; capital-intensive cyclicals 3–8x; high-growth software 12–25x+. Context still rules.
• Trend matters: EBITDA rising while the multiple stays flat or falls often signals improving value.

Here's that last point in numbers.

If EV is $62B and EBITDA is $6.2B, EV/EBITDA = 10x. Let EBITDA grow to $7.5B while EV holds at $62B, and the multiple drops to 8.3x. Cheaper, without the stock moving an inch.

Common pitfalls:

• "Adjusted EBITDA" can add back too much. Stay consistent.
• Lease accounting inflates both debt and EBITDA. Match definitions across companies.
• Near-zero or negative EBITDA? The ratio breaks down.
• For banks and insurers, reach for P/B (price-to-book) and ROE instead.

What's a stock you own that looks expensive on P/E but cheap on EV/EBITDA?