EV/EBITDA

EV/EBITDA is a valuation ratio that divides a company's Enterprise Value by its Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures how many times annual operating earnings an acquirer would pay to buy the entire business, including assuming its debt.

Why Analysts Prefer It

Unlike the P/E ratio, which only accounts for equity value, EV/EBITDA incorporates debt into both sides of the equation. Enterprise Value includes market capitalization plus debt minus cash. EBITDA strips out the cost of that debt. This makes the ratio far more useful for comparing companies with different capital structures.

Two companies with identical operations but different debt levels will have very different P/E ratios but similar EV/EBITDA multiples. This is why investment bankers and M&A professionals rely on EV/EBITDA rather than P/E when evaluating acquisition targets.

Sector benchmarks vary widely. Utilities typically trade at 6 to 10 times EBITDA. Industrials at 8 to 12 times. Healthcare at 10 to 15 times. Technology companies at 15 to 25 times or more. Fair Price Index uses EV/EBITDA as part of its relative valuation model.