What Is the EV/EBITDA Multiple?
EV/EBITDA compares the total value of a company's operations, its enterprise value, to its earnings before interest, taxes, depreciation, and amortization. Because both the numerator and denominator are available to all capital providers, the multiple is independent of how a company is financed.
It also strips out differences in depreciation policy and tax situations, which makes it the default multiple for comparing companies across borders, capital structures, and accounting choices. For most industries, bankers quote deal values and trading levels in terms of EV/EBITDA before anything else.
How It Works
You compute enterprise value as equity value plus debt, preferred, and minority interest minus cash, then divide by EBITDA for a chosen period, commonly the last twelve months (LTM) or the next fiscal year (forward). A lower multiple suggests a cheaper valuation relative to operating earnings, while a higher multiple typically reflects stronger growth, margins, or quality.
Analysts are careful to match the numerator and denominator in time and scope, for example pairing EV with LTM EBITDA adjusted for one-time items. Comparing a company's multiple against peers, its own history, and precedent deals is how the raw number becomes a valuation judgment.
Example
A company has equity value of $4.2 billion, debt of $1.0 billion, and cash of $200 million, so EV = $4.2B + $1.0B - $0.2B = $5.0 billion. With LTM EBITDA of $500 million, EV/EBITDA = $5.0B / $0.5B = 10.0x.
If close peers trade at a median of 12.0x, applying that multiple implies an EV of 12.0 x $500M = $6.0 billion, suggesting roughly $1.0 billion of potential upside before asking why the discount exists. A favorite interview question is why EV/EBITDA can be used across companies with different leverage while P/E cannot.
Why It Matters
EV/EBITDA anchors comparable company analysis, precedent transactions, and LBO purchase price discussions, and lenders size debt packages as a multiple of EBITDA. Its main blind spot is that EBITDA ignores capital expenditures, so for capital-intensive businesses analysts sanity-check it with EV/EBIT or free cash flow measures.
Being able to compute, interpret, and criticize this multiple fluently is table stakes for any IB or PE interview.
