What is EV/EBITDA — the ratio professionals use most
EV/EBITDA is one of the most widely used valuation ratios among professional investors. It sounds complicated but the idea is straightforward.
What EV and EBITDA mean
EV (Enterprise Value) is the total cost to buy the entire company, including its debt. EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortisation — roughly, how much operating cash the business generates before accounting adjustments.
EV/EBITDA tells you: how many years of operating earnings would it take to pay back the total price of the company?
Why EV is better than market cap
Market cap only counts the equity — what shareholders own. But if you buy a company, you also inherit its debt. And you get its cash.
EV = Market Cap + Total Debt − Cash. Two companies with the same market cap but different debt levels are very different purchases. EV makes this comparison fair.
Why EBITDA instead of profit?
Net profit after tax is affected by how the company finances itself (interest on debt), which country it operates in (tax rates), and accounting choices (depreciation methods). EBITDA strips all of this out and shows the raw operating performance of the business.
This makes it easier to compare companies across different countries, different capital structures, and different accounting policies.
What is a reasonable EV/EBITDA?
This varies significantly by sector: IT and software typically trades at 15–25×. FMCG at 20–35×. Manufacturing at 8–15×. Steel and metals at 6–10×. Infrastructure at 8–12×. Banks are not applicable — use P/B instead.
A company trading at 8× EV/EBITDA in a sector where peers trade at 15× may be worth investigating. A company at 40× in a sector where 15× is normal needs a very good reason.
The limitation
EBITDA excludes depreciation — but depreciation is a real cost. A company with ₹1,000 crore of EBITDA but ₹800 crore of depreciation (meaning assets constantly need replacing) is very different from one where depreciation is ₹100 crore.
This is why capital-intensive businesses like steel, cement, and telecom often look cheaper on EV/EBITDA than they really are. The depreciation they exclude is real money going out the door.
See it in practice
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