Metric Explainer: EV/EBITDA
A valuation metric that compares the total value of a company (including debt) to its operating earnings. More comprehensive than PE because it accounts for...
Simple definition
A valuation metric that compares the total value of a company (including debt) to its operating earnings. More comprehensive than PE because it accounts for debt.
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"EV/EBITDA batata hai ki company ke total value (equity + debt) ke against operating earnings kitna hai. PE se better hai kyunki debt ko bhi consider karta hai."
Why it matters
- Capital structure neutral — unlike PE, it's not distorted by different debt levels
- The preferred multiple for M&A — acquirers pay off both equity AND debt
- Cross-company comparison — two companies with same operations but different debt are comparable on EV/EBITDA
- Sector standard for valuations in industrials, telecom, and infrastructure
Formula
EV/EBITDA = Enterprise Value / EBITDA
Where EV = Market Cap + Total Debt − Cash & Equivalents
How to calculate
| Step | Source | Example |
|---|---|---|
| 1. Market Cap | Price × Shares | ₹50,000 Cr |
| 2. + Total Debt | Balance Sheet | ₹15,000 Cr |
| 3. − Cash & Equivalents | Balance Sheet | ₹5,000 Cr |
| 4. Enterprise Value | ₹60,000 Cr | |
| 5. EBITDA (TTM) | P&L | ₹8,000 Cr |
| 6. EV/EBITDA | 7.5× |
Good range — by sector
| Sector | Cheap | Fair | Expensive |
|---|---|---|---|
| IT Services | < 15 | 15–25 | > 25 |
| FMCG | < 25 | 25–40 | > 40 |
| Auto | < 8 | 8–15 | > 15 |
| Telecom | < 6 | 6–10 | > 10 |
| Steel/Cement | < 5 | 5–10 | > 10 |
| Pharma | < 12 | 12–20 | > 20 |
| Banking/NBFC | Not applicable | — | — |
Not for banks
EV/EBITDA is meaningless for banks/NBFCs because debt IS their business, and EBITDA is not a relevant metric. Use PB ratio or PE ratio for banks.
EV/EBITDA vs PE: When to prefer which
| Use EV/EBITDA when | Use PE when |
|---|---|
| Companies have different debt levels | Companies are debt-free or similar leverage |
| Comparing for M&A purposes | Quick screening of large-cap universe |
| Capital-intensive businesses (infra, telecom) | Service businesses (IT, consulting) |
| Companies with different tax rates | Companies in the same tax jurisdiction |
Common mistakes
Mistakes to avoid
- Using for banks — Debt is bank inventory, not leverage. EV is meaningless
- Forgetting to subtract cash — EV = MCap + Debt − Cash. Leaving out cash overstates EV
- Using unadjusted EBITDA — Remove one-time items for a fair multiple
- Ignoring lease liabilities — Under IndAS 116, include lease debt in EV for consistency
Real example: Why EV/EBITDA > PE for comparison
| Metric | Company A (Debt-free) | Company B (Leveraged) |
|---|---|---|
| Market Cap | ₹20,000 Cr | ₹12,000 Cr |
| Debt | ₹0 | ₹10,000 Cr |
| Cash | ₹2,000 Cr | ₹1,000 Cr |
| EV | ₹18,000 Cr | ₹21,000 Cr |
| EBITDA | ₹3,000 Cr | ₹3,000 Cr |
| EV/EBITDA | 6.0× | 7.0× |
| PE | 18× | 25× |
PE makes Company B look much more expensive (25× vs 18×). But EV/EBITDA shows they're similar (6× vs 7×). The PE gap is just a capital structure effect — the businesses are comparable.
Red flags
- EV/EBITDA significantly above sector peers — overvalued or a quality premium?
- Very low EV/EBITDA (< 3) — may signal business distress or declining EBITDA ahead
- Rapidly rising EV/EBITDA without business improvement — sentiment-driven
- Negative Enterprise Value — more cash than debt + market cap (rare anomaly)
Related metrics
- EBITDA — The denominator
- Enterprise Value — The numerator
- PE Ratio — Simpler alternative
- Market Cap — Equity component of EV