What Is EV/EBITDA?

The P/E ratio fails when two companies look the same on earnings but one is buried in debt and the other has none.

You are paying for the whole company — equity and debt. P/E only shows you the equity slice.

EV/EBITDA fixes that. It compares the total cost of ownership against the operating earnings that have to service it.

The formula#

EV/EBITDA = Enterprise Value / EBITDA

Enterprise Value = Market Cap + Total Debt − Cash. The real acquisition cost.

EBITDA = Earnings before interest, taxes, depreciation, and amortization. A proxy for operating cash generation before financing charges.

Read together: how many years of operating earnings does it take to pay back the full cost of buying this business?

At 10×, roughly ten years. At 25×, roughly twenty-five — assuming EBITDA stays flat. Markets pay higher multiples when they expect it to grow.

What the market is paying right now#

Across 3,444 US companies with positive EBITDA, the cap-weighted EV/EBITDA sits at 12.7× today.

848 stocks are below 8.0× — cyclicals near peak earnings, capital-heavy businesses, and companies where EBITDA is strong but cash conversion is poor.

626 stocks trade above 25.0× — recurring revenue businesses, high-margin franchises, and growth companies the market trusts to keep compounding.

A 5× energy producer and a 30× SaaS platform are not priced by the same logic.

The sector gap matters more than the headline#

Technology trades at the highest average EV/EBITDA in the market. Energy trades at the lowest.

That gap is structure, not opportunity.

A software company collects subscription revenue through recessions, spends almost nothing on fixed assets, and expands margins as it scales. A commodity producer earns $10B in EBITDA when prices are high and $2B when they are low — and the trailing multiple captures whichever moment you happen to look.

The premium paid for predictability is real. So is the discount applied to cyclicality.

A real company#

Microsoft Corporation (MSFT) currently trades at 20.0× EV/EBITDA. That is a bet on EBITDA growth: the company's EBITDA roughly doubled from ~$60B in 2020 to over $130B by 2024 as Azure and Microsoft 365 scaled — the multiple compressed from the top even as the stock price rose.

The inverse lesson: in 2016, AB InBev acquired SABMiller at roughly 11× combined EBITDA — betting on cost synergies and emerging-market volume. The synergies partially arrived.

The $80B+ in remaining net debt did not disappear. AB InBev cut its dividend twice in four years. The company could not grow EBITDA fast enough to service it.

A high EV/EBITDA is a bet on growth. A leveraged low multiple is a bet on stability. Either way, EBITDA has to perform.

Where EV/EBITDA breaks#

EBITDA is not free cash flow. Depreciation exists because assets wear out and need replacing. A pipeline, a factory, a cable network — they all need constant capital spending just to stay flat. Adding depreciation back overstates real earnings power for those businesses.

For asset-light software and consumer brands, the add-back is harmless. That is exactly why EV/EBITDA dominates technology M&A. Always cross-check with Price to Free Cash Flow.

Adjusted EBITDA can be gamed. Private equity deals and growth companies routinely strip out stock compensation, restructuring charges, and "one-time" costs. If those one-time costs repeat every year, they are not one-time. Always check how far adjusted EBITDA sits above GAAP.

Debt still matters after the multiple. Two companies at 8× EV/EBITDA are not equal if one carries 6× EBITDA in debt. The leveraged one has far less margin for error if earnings fall.

Does not apply to financials. Banks and insurers do not have meaningful EBITDA. Use P/E or Price-to-Book there.

How to use it#

• Compare within sectors only — a 7× energy company and a 25× SaaS company are priced by completely different logic; the numbers are not interchangeable.
• Check free cash flow conversion after the multiple — strong EBITDA but weak FCF means heavy capex is eating the earnings power the multiple is paying for.
• Inspect debt coverage — two companies at 8× EV/EBITDA are not equal if one carries 6× net debt/EBITDA and the other carries none; the leveraged one has far less margin for error.
• Check how far adjusted EBITDA sits above GAAP — if "one-time" charges repeat every year, the multiple is cheaper on paper than in reality.
• Use the Low EV/EBITDA screen for candidates — then ask why each one is cheap and whether EBITDA is at a cyclical peak.

Bottom line#

EV/EBITDA is the honest version of P/E — it prices what you are actually buying, including the debt that comes with it.

A low multiple can mean cheap, or it can mean the market expects EBITDA to fall. A high multiple can mean expensive, or it can mean the market is right that EBITDA will keep growing.

Every serious buyer of a business uses EV/EBITDA instead of P/E. That should tell you something about whose perspective you are borrowing when you use it.