EV/EBITDA
ValuationEnterprise value divided by EBITDA — the valuation multiple private equity and M&A professionals use to price entire businesses, capital structure and all.
EV/EBITDA — Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortisation — is the primary transaction multiple used in leveraged buyout analysis, M&A valuation, and cross-capital-structure comparisons. Enterprise Value captures the total cost to acquire a business (market cap + net debt + minority interests + preferred equity), making it capital-structure neutral. Dividing by EBITDA then provides a multiple of operating cash generation that is comparable across companies with different levels of leverage, tax rates, and depreciation policies. The multiple represents how many years of EBITDA it would take to pay back the enterprise value — lower is cheaper. Investment-grade credit agreements typically require total debt to remain below 4–5× EBITDA, making EV/EBITDA a direct bridge between equity valuation and credit analysis.
Enterprise Value = Market Cap + Total Debt − Cash & Equivalents (+ minority interest, preferred equity if applicable). EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation. Dividing EV by EBITDA gives the number of years of operating earnings needed to 'pay back' the full acquisition cost.
Low multiple relative to peers suggests either undervaluation or a structural concern. In cyclical sectors, low EV/EBITDA at peak earnings is often a sell signal rather than a buy — the E is cyclically elevated.
Broadly normal range for established businesses. Exact fair value varies significantly by sector — tech companies typically trade at higher multiples than industrials or energy.
Significant premium — implies strong growth expectations, scarcity value, or high-quality recurring revenue. SaaS businesses regularly trade at 20–40× EV/EBITDA. Justified by growth; dangerous if growth disappoints.
EV/EBITDA is the lingua franca of business valuation in M&A and private markets. It strips out capital structure differences, making it the most useful metric for comparing companies with different debt levels — including comparing public companies to private market transaction comps. If a sector typically trades at 10–12× EV/EBITDA in private markets, a public company trading at 7× may represent a takeover opportunity. It also directly connects to leverage analysis: lenders set debt covenants at fixed EV/EBITDA multiples.
EV/EBITDA can be gamed through aggressive add-backs. Companies preparing for sale often present 'adjusted EBITDA' that adds back restructuring charges, stock-based compensation, and one-time items — sometimes eliminating costs that are actually recurring. Always compare reported EBITDA to adjusted EBITDA and scrutinise the gap. Heavy SBC add-backs in particular mean real cash compensation is being ignored, making the business look cheaper than it actually is.