Term · Valuation
EV/EBITDA
In briefEV/EBITDA compares enterprise value with earnings before interest, taxes, depreciation, and amortization. This is helpful for capital-intensive small caps, since heavy depreciation drags the EBIT margin down optically.
Definition
EV/EBITDA relates enterprise value to EBITDA. It compares a value for all capital providers with earnings before interest, taxes, depreciation, and amortization.
How it is calculated
Formula. EV/EBITDA = enterprise value ÷ consistently defined EBITDA.
Why it matters for small caps
EV/EBITDA is useful for capital-intensive small caps, because high depreciation can optically depress the EBIT margin.
Common misreadings
- EBITDA is not cash flow and ignores investment needs. Leases, adjustments, and differing EBITDA definitions can distort peer comparisons.
In the process
Frequently asked
What is the EV/EBITDA ratio?
It is a valuation multiple that relates enterprise value to EBITDA. This allows the valuation to be viewed before the influence of depreciation and amortization.
When is EV/EBITDA especially suitable?
With high depreciation, it provides a fairer comparison than earnings-based multiples. It is important that EBITDA is defined consistently.
What are the limits of EV/EBITDA?
The multiple accounts for neither ongoing investment needs nor the actual cash development. Lease effects, aggressive adjustments, and inconsistent EBITDA definitions can also distort the comparison with competitors.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.