EV/EBITDA divides enterprise value by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). It's the standard valuation multiple for M&A transactions because it removes the effects of capital structure, tax strategy, and non-cash charges.
Why EV/EBITDA Instead of P/E?
Price-to-Earnings (P/E) is affected by leverage (interest expense) and tax optimisation. Two identical businesses with different debt levels show very different P/E multiples. EV/EBITDA eliminates these distortions, making it more useful for comparing companies across capital structures.
What Is Enterprise Value?
EV is what an acquirer actually pays: they buy the market cap (equity) and assume the debt, but receive the cash on hand.
EV/EBITDA vs EV/Revenue
EV/EBITDA requires positive EBITDA. For early-stage or high-growth SaaS companies with near-zero EBITDA, investors use EV/Revenue (also called Price-to-Sales) instead. As companies mature and EBITDA grows, the market transitions from revenue multiples to EBITDA multiples.
Limitations
- EBITDA excludes CapEx — capital-intensive businesses look cheaper than they are on EV/EBITDA
- Addbacks (one-time adjustments) can inflate Adjusted EBITDA in seller presentations
- Not useful for financial services or insurance companies