EV to EBITDA ratio

A ratio compares the price the market puts on a stock to a measure of the business, such as its earnings, its assets, or its cash flow. It tells you how expensive a stock is relative to that measure, not just whether the share price is high or low in absolute terms.

EV to EBITDA divides enterprise value by EBITDA. Because enterprise value already accounts for debt and cash, and EBITDA strips out interest, taxes, depreciation, and amortisation, this ratio allows comparison between companies with very different capital structures and financing choices, something P/E cannot do cleanly.

The formula is:

This ratio is especially common when comparing companies in capital intensive industries, or when comparing a company that carries a lot of debt against one that carries very little, since P/E alone would be distorted by the difference in interest expense.