Valuation
EV/EBITDA
Enterprise value divided by earnings before interest, tax, depreciation and amortisation.
How it works
It compares the whole business to a rough measure of its operating cash generation, stripping out financing decisions, tax regimes and accounting choices about asset lives.
That neutrality is why it dominates in mergers and acquisitions, and in comparisons across countries.
Where it misleads people
EBITDA ignores the capital spending needed to keep the business running. A cable operator and a software company on the same EV/EBITDA are not similarly priced, because one has to spend enormously every year and the other does not.
Formula
EV/EBITDA = enterprise value ÷ EBITDARelated terms
- Enterprise valueWhat it would cost to buy the whole business: market value plus debt, minus cash.
- EBITDAEarnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation.
- Capital expenditureMoney spent buying or upgrading long-lived assets like property, equipment and technology.
- Free cash flowCash left over after paying for the investment needed to maintain and grow the business.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.