Understanding EV/EBITDA: Definition, Calculation & Examples

The EV/EBITDA ratio is one of the most commonly used metrics in financial analysis and company valuation. It links a company’s total valuation—measured by Enterprise Value (EV)—with its earnings before interest, tax, depreciation, and amortisation (EBITDA). This metric provides a clearer picture of a company’s worth, especially when comparing businesses with different debt levels and capital structures.

For investors who are self-directed or new to stock market investing, understanding this ratio can offer insights into whether a company is relatively overvalued or undervalued. This page explores the definition, calculation, practical use cases, industry benchmarks, and examples of EV/EBITDA in detail.

A strong understanding of enterprise value and EBITDA is essential before using the EV/EBITDA ratio.

What is Enterprise Value (EV)

Enterprise Value represents the total value of a company, including both equity and debt, minus any cash or cash equivalents. It is considered a more accurate representation of a firm’s true market value than market capitalisation alone.

Enterprise Value is calculated as:

Enterprise Value = Market Capitalisation + Total Debt + Minority Interest + Preferred Shares – Cash & Cash Equivalents

EV gives a complete picture of what it would cost to acquire a business outright, making it a preferred metric in mergers, acquisitions, and company comparisons.

What is EBITDA

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. It measures a company’s core operational profitability by stripping out the impact of non-operating expenses and accounting decisions.

There are two primary ways to calculate EBITDA:

• EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation
  

• EBITDA = EBIT (Operating Profit) + Depreciation + Amortisation

EBITDA allows comparison between companies by focusing purely on earnings from operations, without being skewed by different financing or accounting policies.

Why EV and EBITDA Belong Together

The strength of the EV/EBITDA ratio lies in its ability to compare companies regardless of their capital structures. Since EV includes debt and EBITDA ignores financing costs, the ratio highlights how efficiently a business generates earnings relative to its total value.

EV/EBITDA is easy to compute once you gather the correct inputs.

EV/EBITDA Formula

EV/EBITDA = Enterprise Value ÷ EBITDA

This gives a multiple that can be interpreted as how much investors are willing to pay for each unit of operational earnings.

How to Collect and Calculate Input Data

To calculate EV:

1. Multiply the current share price by the total number of outstanding shares (market cap).
   

2. Add total debt (short- and long-term), minority interests, and preferred shares.
   

3. Subtract cash and cash equivalents from the total.

To calculate EBITDA:

1. Start with net income.
   

2. Add back interest, taxes, depreciation, and amortisation.

Ensure all data points come from the same financial period, and check audited financial statements or reliable financial data sources.

Practical Example Calculation

Suppose a company has the following data:

• Market Capitalisation: ₹1,200 Crores
  

• Total Debt: ₹300 Crores
  

• Cash & Equivalents: ₹100 Crores
  

• EBITDA: ₹200 Crores
  

EV = ₹1,200 + ₹300 – ₹100 = ₹1,400 Crores
EV/EBITDA = ₹1,400 ÷ ₹200 = 7

This means the company is valued at 7 times its EBITDA.

Common Adjustments and Variations

EBITDA may need to be adjusted to exclude non-recurring items such as:

• One-off legal settlements
  

• Restructuring expenses
  

• Gain/loss on asset sales

EV can also be adjusted for market expectations by using Forward EBITDA or Trailing Twelve Months (TTM) EBITDA, depending on the analysis purpose.

Understanding what the multiple implies is essential before using it for investment evaluation.

What Is a “Good” EV/EBITDA Ratio

There is no universal "good" ratio. However, many analysts consider a range between 6 and 10 to be normal for mature companies. High-growth companies may have much higher multiples due to future earnings expectations.

The ideal range depends heavily on the industry and economic context.

Sector Benchmarks and Comparisons

Here is an industry-wise look at average EV/EBITDA multiples:

These figures show how multiples vary across sectors based on capital intensity, growth expectations, and risk levels.

Key Limitations and Caveats

• EV/EBITDA does not account for capital expenditures or changes in working capital.
  

• It may mislead in industries with high non-cash costs or where debt levels are extreme.
  

• It ignores future growth potential unless forward EBITDA is used.

Let’s compare how the ratio plays out in different industries using real-world-like data.

Example A: Technology Company

• EV = ₹2,500 Crores
  

• EBITDA = ₹125 Crores
  

• EV/EBITDA = 20

Higher multiples are common due to strong growth outlooks.

Example B: Industrial Manufacturer

• EV = ₹1,500 Crores
  

• EBITDA = ₹150 Crores
  

• EV/EBITDA = 10

Reflects capital intensity and stable margins.

Example C: Retail Business

• EV = ₹1,800 Crores
  

• EBITDA = ₹180 Crores
  

• EV/EBITDA = 10

Consistent revenue streams yield mid-range valuations.

For individual investors, EV/EBITDA can be a helpful screening tool when used responsibly.

Compared to P/E Ratio

While the P/E ratio focuses on net earnings available to shareholders, EV/EBITDA evaluates total enterprise value relative to core operating earnings. It is especially useful when comparing companies with varying debt loads.

Use in M&A, Stock Screening, Valuation

Private equity firms, acquirers, and analysts often use EV/EBITDA to estimate fair acquisition value. Retail investors can use it to find relatively undervalued stocks in the same sector.

Practical Tips for Investors

• Avoid relying on a single year’s EBITDA
  

• Always compare companies within the same sector
  

• Adjust for accounting anomalies
  

• Use it alongside P/E, P/B, and free cash flow yield

EV/EBITDA is a versatile, sector-neutral valuation tool that provides meaningful insights when used correctly. It enables investors to gauge the market’s valuation of a company’s core operating performance. Though powerful, it should be used in combination with other financial ratios and qualitative assessments for sound analysis.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

• Investopedia — What Is Considered a Healthy EV/EBITDA?, https://www.investopedia.com/ask/answers/072715/what-considered-healthy-evebitda.asp
  

• NYU Stern — Enterprise Value Multiples by Sector (US), https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
  

• Corporate Finance Institute — EV/EBITDA Overview, https://corporatefinanceinstitute.com/resources/valuation/ev-ebitda/
  

• Investopedia — EBITDA: Definition, Calculation Formulas, https://www.investopedia.com/terms/e/ebitda.asp
  

• Siblis Research — EV/EBITDA Multiple by Sector, https://siblisresearch.com/data/ev-ebitda-multiple/