What is EV/EBITDA — the ratio professionals use most
EV/EBITDA answers a slightly different question than P/E. Instead of comparing price to profit, it compares a company's entire value — including its debt — to its core operating earnings.
Written by Shahzeb Malik
The formula
EV = Market Cap + Total Debt − Cash. EV/EBITDA = Enterprise Value ÷ EBITDA.
Enterprise Value represents what it would actually cost to buy the entire company outright — its equity (market cap) plus what you would need to pay off its lenders (debt), minus the cash sitting in its accounts that you would immediately recover.
EBITDA — Earnings Before Interest, Tax, Depreciation, and Amortisation — strips out financing choices and accounting adjustments to show the raw operating performance of the business.
A worked example — why P/E can mislead
Take two mid-sized manufacturers, both with ₹800 Cr market cap and ₹200 Cr EBITDA. On a pure P/E basis they look identically priced.
Company A carries ₹300 Cr debt and ₹100 Cr cash. Its EV = ₹800 + ₹300 − ₹100 = ₹1,000 Cr. EV/EBITDA = 5×.
Company B has no debt and ₹200 Cr cash. Its EV = ₹800 + ₹0 − ₹200 = ₹600 Cr. EV/EBITDA = 3×.
Same market cap. Same EBITDA. P/E says they are equally priced. EV/EBITDA says Company B is meaningfully cheaper — because any buyer of Company A also inherits ₹300 Cr of debt. That gap is exactly what P/E misses.
Why EBITDA instead of profit?
Net profit 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, making it easier to compare companies across different capital structures — especially in capital-intensive sectors like manufacturing, telecom, and infrastructure, where debt levels and depreciation schedules vary enormously.
What is a reasonable EV/EBITDA?
It varies significantly by sector. Capital-intensive businesses (steel, cement, telecom) often trade at 5–8×, reflecting heavy infrastructure and debt loads. Asset-light businesses (IT services, consumer brands) often trade at 12–20×+, reflecting higher growth expectations and lower capital needs.
A company trading at 8× in a sector where peers trade at 15× may be worth investigating. A company at 40× where 15× is normal needs a very good reason.
Limitations
EBITDA excludes real costs. Interest payments and taxes are genuine cash outflows. Depreciation exists because assets actually wear out and eventually need replacing — a company with ₹200 Cr EBITDA but ₹150 Cr annual capex is very different from one where maintenance spend is minimal.
Use EV/EBITDA as one lens alongside free cash flow and debt ratios, not in isolation.
See it in practice
This article is for educational purposes only. It is not investment advice and does not constitute a recommendation to buy, sell, or hold any security. Please consult a SEBI-registered investment adviser before making any investment decision.