Level 6 · Financial Ratios
EV/EBITDA
The valuation multiple that refuses to ignore debt.
In this lesson
What you'll be able to do
- Calculate enterprise value
- Compute EV/EBITDA
- Explain why it beats P/E in some cases
- Know its limitations
Think about it
You buy a house for ₹80 lakh but also inherit its ₹40 lakh loan. What did the house really cost you?
Story
Let's picture it
Two companies both have a market capitalisation of ₹1,000 crore. The first has zero debt and ₹200 crore of cash. The second has ₹800 crore of debt and no cash. Buying the whole of the first really costs ₹800 crore; buying the second really costs ₹1,800 crore. Market cap alone hid a difference of more than twice.
Visual
Building enterprise value
Market capitalisation
Share price × number of shares
+ Total debt
An acquirer inherits the borrowings
− Cash and equivalents
An acquirer also gets the cash
= Enterprise value
The true cost of acquiring the whole business
Plain English
The simple explanation
Enterprise value is market capitalisation plus debt minus cash, what it would genuinely cost to buy the entire business, obligations included.
EV/EBITDA divides that by operating earnings before depreciation. Because both the numerator and denominator ignore financing choices, it compares companies with different capital structures fairly.
It is widely used in mergers and acquisitions and for capital-intensive sectors. Its weakness is inherited from EBITDA: it ignores capital expenditure, so two firms with identical EV/EBITDA can have very different cash realities.
Real world
Telecom and cement
In highly leveraged, capital-heavy sectors, analysts lean on EV/EBITDA because P/E is distorted by interest costs and depreciation policies. It is the standard multiple quoted in most acquisition discussions in these industries.
Watch out
Common mistakes
- Using market cap instead of enterprise value when debt is large.
- Comparing EV/EBITDA across unrelated sectors.
- Overlooking heavy capital expenditure needs.
Did you know?
In most acquisition negotiations the headline price is expressed as an EV/EBITDA multiple rather than a per-share price, because the buyer is taking on the debt too.
Your turn
Mini challenge
Calculate enterprise value for one leveraged company and compare it with its market capitalisation.
Quick quiz
1 / 5
Wrap up
Summary
Enterprise value captures what buying the whole business really costs. EV/EBITDA compares companies fairly across different debt levels, but still ignores capital spending.
- EV = market cap + debt − cash
- EV/EBITDA is capital-structure neutral
- Standard multiple in M&A
- Still blind to capex
Revise