EV/EBITDA Multiple Explained: When to Use & How to Calculate
Learn everything about the EV/EBITDA multiple - the most important valuation metric in finance.
EV/EBITDA is arguably the most important valuation multiple in finance. It's used in M&A, LBOs, equity research, and everyday company comparisons. This guide covers everything you need to know for interviews.
What is EV/EBITDA?
EV/EBITDA = Enterprise Value / EBITDAThis multiple tells you how many years of EBITDA it would take to pay off the entire enterprise value of a business (ignoring growth, taxes, and reinvestment).
Note
Quick interpretation: A 10x EV/EBITDA means the company is valued at 10 times its annual EBITDA. Lower multiples generally indicate cheaper valuations (all else equal).
Test Yourself
Interview Question
Company has EV of $500M and EBITDA of $50M. What is its EV/EBITDA multiple?
Why EV/EBITDA is So Popular
Advantages of EV/EBITDA
| Term | Definition | Note |
|---|---|---|
| Capital Structure Neutral | Not affected by how a company is financed | Major advantage |
| Excludes Non-Cash Charges | D&A doesn't affect EBITDA | Better comparability |
| Rarely Negative | EBITDA is usually positive even when Net Income isn't | Always usable |
| Cash Flow Proxy | Approximates operating cash generation | Intuitive |
| Industry Standard | Widely used in M&A and PE | Universal acceptance |
Test Yourself
Interview Question
Two companies have identical EBITDA of $100M. Company A has no debt; Company B has $300M debt. How do their EV/EBITDA multiples compare?
What Drives Higher vs Lower Multiples?
Test Yourself
Interview Question
Company A and Company B both have $100M EBITDA. Company A trades at 15x, Company B at 8x. Which is most likely to explain the difference?
Multiple Drivers
| Term | Definition | Note |
|---|---|---|
| Growth Rate | Higher growth → Higher multiple | Most important driver |
| Margin Profile | Higher margins → Higher multiple | Quality indicator |
| Recurring Revenue | More predictable → Higher multiple | Lower risk premium |
| Market Position | Market leader → Higher multiple | Competitive moat |
| Capital Intensity | Lower CapEx needs → Higher multiple | Better FCF conversion |
| Cyclicality | Less cyclical → Higher multiple | Lower risk |
Limitations of EV/EBITDA
Test Yourself
Interview Question
For which type of company is EV/EBITDA LEAST appropriate as a valuation metric?
Watch Out For
- Ignores CapEx: Two companies with same EBITDA but different CapEx needs have very different cash flows
- Ignores Working Capital: Growing companies may need significant working capital investment
- Not meaningful for financials: Interest is a core operating expense for banks/insurers
- Can be manipulated: Management has discretion on what's included in "adjusted EBITDA"
- Doesn't account for growth: A 10x company growing 5% vs 20% are very different
The 'Adjusted EBITDA' Problem
Test Yourself
Interview Question
A company reports 'Adjusted EBITDA' of $100M by adding back $30M in 'one-time restructuring costs.' This is the third year in a row they've had such adjustments. What should you do?
Key Takeaways
Key Takeaway
- EV/EBITDA is the most important M&A and PE multiple
- It's capital structure neutral—both numerator and denominator are "all capital provider" metrics
- Compare to industry peers, not absolute thresholds
- Understand the limitations: ignores CapEx, working capital, and doesn't work for financials
- Multiple drivers: growth, margins, market position, predictability
- Be skeptical of adjusted EBITDA: recurring 'one-time' costs are red flags
Related Valuation Guides
- Enterprise Value vs Equity Value — Understanding what EV represents
- Walk Me Through a DCF — Alternative intrinsic valuation method
- LBO Explained Simply — How PE firms use EV/EBITDA multiples