EV/EBITDA Ratio

Enterprise value is equity value plus net debt, so the ratio is not distorted by a choice between debt and equity the way P/E can be. EBITDA is profit before interest, tax, depreciation, and amortization.

Analysts use it to compare firms with different capital structures and different depreciation policies, especially in capital-heavy industries.

A lower EV/EBITDA than peers can mean a cheaper operating business, if EBITDA is sustainable and maintenance capital spending is similar. It is a poor comparison when one firm must reinvest far more cash to keep EBITDA flat.

EBITDA is not cash flow. It ignores working-capital needs, tax, interest, and the capital expenditure required to stay in business. Add those back in before treating a low multiple as a buy signal.