EV/EBITDA | Investing Glossary

What it is

EV/EBITDA compares the total value of a business — equity plus net debt — against its operating earnings before financing costs and accounting adjustments. It's the multiple that investment banks, private equity firms, and M&A advisers use most often, because it gives a capital-structure-neutral view of valuation.

When you hear that a company was acquired "at 11 times EBITDA", this is the ratio they're referring to.

How to calculate it

**EV/EBITDA = Enterprise Value ÷ EBITDA**

Enterprise Value (EV) = Market Capitalisation + Net Debt − Cash + Minority Interests + Preferred Equity

EV is what a buyer would pay to own the entire business outright, including taking on the debt but also receiving any cash on the balance sheet. It captures the true cost of acquisition in a way that market cap alone cannot.

EBITDA is earnings before interest, taxes, depreciation, and amortisation — a proxy for operating cash generation that strips out financing costs and accounting conventions.

Why it beats the P/E ratio in many situations

The P/E ratio uses equity earnings (after interest) and is divided by equity value (market cap). This means it's distorted by leverage. Two identical operating businesses — same revenue, same margins, same cash flows — will have very different P/E ratios if one has significant debt and the other is debt-free. The indebted company's earnings are reduced by interest payments, lowering the denominator and artificially inflating the P/E.

EV/EBITDA sidesteps this because EBITDA is pre-interest, and EV captures the debt in the numerator. You're comparing apples to apples.

This is why EV/EBITDA is essential for:

Cross-sector comparison — comparing a highly geared utility to an ungeared technology company
Takeover analysis — the entire value a buyer is paying, including assumed debt
Companies with recent large acquisitions — where goodwill amortisation distorts the P/E

Typical multiples by sector (UK, 2025)

Sector	Typical EV/EBITDA
Technology	18–35x
Consumer staples	12–18x
Healthcare	14–20x
Industrials	8–14x
Retail	6–10x
Banks / Financials	Not applicable*
Mining / Resources	4–8x

Banks are valued on Price/Book and ROE, not EV/EBITDA, because their balance sheet is their product.

The limitations

EV/EBITDA has the same fundamental weakness as EBITDA: it ignores capital expenditure. A steel company and a software company might both trade at 10x EBITDA, but the steel company is spending 60% of that EBITDA back in CapEx just to maintain its assets. The software company spends almost nothing.

This is why EV/EBIT (enterprise value to operating profit after depreciation) and EV/FCF (enterprise value to free cash flow) are often more rigorous. They penalise capital-intensive businesses appropriately.

For businesses where depreciation is genuinely a good proxy for maintenance CapEx — primarily businesses without large physical asset bases — EV/EBITDA works well. For capital-heavy businesses, treat it as a starting point, not a conclusion.

**In practice:** When a takeover is announced, look at the EV/EBITDA multiple versus the sector average. Deals done above the sector average imply a control premium and typically require synergies to justify the price. Deals below the sector average may indicate either a bargain or a struggling business the buyer knows better than the market.

Not financial advice. Always review full financial statements and sector context.