What Is EV/EBITDA
Imagine buying a company outright. Is it done once you pay for the shares? No—you also have to take on the company's debt. The metric born from this perspective is EV/EBITDA.
Starting with EV (enterprise value)
EV (Enterprise Value) shows 'how much would it actually cost to buy this company outright?'
EV = market cap + total debt − cash and cash equivalents
Why add debt and subtract cash? Because when you acquire the company you also take on its debt, so you add it; and since the cash the company holds can be used right after the acquisition, you subtract it. So EV is closer to the 'true acquisition cost' than market cap is.
For example, a company with a market cap of about $7.4 billion, debt of about $2.2 billion, and cash of about $740 million has an EV of $7.4 billion + $2.2 billion − $740 million = about $8.9 billion.
EBITDA and the EV/EBITDA formula
EBITDA is 'earnings before interest, taxes, depreciation, and amortization.' Simply put, it's a number that shows 'the rough cash-generating power from the core business.'
EV/EBITDA = enterprise value (EV) ÷ EBITDA
This value can be interpreted as 'how many years it takes to recover the acquisition cost with the EBITDA the company earns.' The lower it is, the more cheaply the company trades relative to its earnings.
It looks similar to the P/E ratio, but there's an important difference. EV/EBITDA strips out differences in capital structure (how much or little debt there is) and in depreciation policy. So it's often fairer than the P/E ratio when comparing companies with different amounts of debt, or companies in different countries or industries with different accounting methods.
Because EBITDA adds depreciation back in, it can mask the 'reinvestment that's actually needed' in capital-intensive industries (manufacturing, telecom, airlines). Remember that a large EBITDA doesn't mean the actual cash left over is large.
When it's useful, and when to be careful
EV/EBITDA shows its strength especially in these cases.
- When pricing an entire company in mergers and acquisitions (M&A) - When comparing rivals with different amounts of debt - When viewing the profit of a company with a heavy depreciation burden more evenly than the P/E ratio would
On the other hand, there are things to watch. Because EBITDA is calculated after excluding depreciation and interest, it can mask the risks of a company with a heavy debt burden or heavy capital reinvestment needs. So EV/EBITDA isn't a cure-all either—you need to view it together with other metrics like the P/E ratio, FCF, and debt ratio for a complete judgment.
常见问题
Q. Is EV/EBITDA always better than the P/E ratio?
It depends on the situation. EV/EBITDA is advantageous when comparing companies with different amounts of debt, or when looking at an industry with a heavy depreciation burden. Conversely, when depreciation and interest are genuinely important risks but EBITDA masks them, it can actually be misleading. The standard practice is to look at both together.
Q. Can I treat EBITDA as 'true profit'?
I don't recommend it. EBITDA is a number before interest, taxes, and depreciation are deducted, so it hides the interest and capital reinvestment burdens the company actually bears. Warren Buffett is known to have been wary of relying on EBITDA. It's better to confirm the actual cash left over using free cash flow (FCF).
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📋 结果基于历史数据计算,过去的收益不代表未来的收益。
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