P/E vs EV/EBITDA
P/E is equity value over earnings after interest. EV/EBITDA is enterprise value over a pre-interest flow. A $50 share on $2.50 of earnings is 20 times. $130,000,000 of enterprise value on $10,000,000 of EBITDA is 13 times. Those are two firms, two claims, two denominators.
| P/E | EV/EBITDA | |
|---|---|---|
| Numerator | Equity: price, or market cap. | Operations: equity plus debt minus surplus cash. |
| Denominator | Earnings after interest, per share or in total. | EBITDA, before interest, tax, depreciation and amortisation. |
| Teaching sheet | $50 / $2.50 = 20 times. Earnings $250,000,000. | $130,000,000 / $10,000,000 = 13 times. Net debt $30,000,000. |
| When the year improves | Raise EPS to $5.00, hold the price: P/E falls to 10. | Raise EBITDA to $13,000,000, hold EV: the multiple falls to 10 times. The identity did not move. |
| What debt does | Sits outside the ratio. A more borrowed firm can print a lower P/E after a smaller residual. | Sits in the numerator. More debt raises EV unless cash rises with it. |
| Are they one firm | Not on this page. The P/E sheet is a $5,000,000,000 market cap. | Not on this page. The EV sheet is a $130,000,000 operations price. A gap between 20 times and 13 times is two fractions, not a signal. |
On this page
Two prices, two flows
P/E prices the residual. On a $50 share with $2.50 of earnings and 100,000,000 shares, the multiple is 20, market capitalisation is $5,000,000,000, and total earnings are $250,000,000. How the P/E ratio works is that identity.
EV/EBITDA prices the operations. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000 and enterprise value is $130,000,000. Against $10,000,000 of EBITDA that is 13 times. How enterprise value works is that identity. How net debt works is the $30,000,000.
Those are two teaching sheets. Lining 20 times up next to 13 times and calling the gap a finding mixes a post-interest residual with a pre-interest operations flow.
A lower multiple can be a better year, not a cheaper claim
Hold the $50 price and raise EPS to $5.00: P/E falls to 10. Market cap is still $5,000,000,000. Hold EV at $130,000,000 and raise EBITDA to $13,000,000: EV/EBITDA falls to 10 times. Net debt is still $30,000,000. In both cases the denominator moved.
Free cash flow is what a DCF actually discounts. EBITDA is a starting point, not cash. Earnings are not cash either. This is educational material, not financial advice.
Worked examples
A \$50 share on \$2.50 of earnings
The share price is $50, EPS is $2.50, and 100,000,000 shares are outstanding. What is P/E, and what is market cap?
- P/E is price over EPS: .
- Market cap: , so $5,000,000,000.
- Total earnings: , so $250,000,000.
- The same P/E from the totals: .
P/E is 20. Market cap is $5,000,000,000. Total earnings are $250,000,000.
The same price on \$5.00 of earnings
Keep the $50 price and 100,000,000 shares. EPS is now $5.00. What is P/E?
- P/E: .
- Market cap is still $5,000,000,000.
- Total earnings: , so $500,000,000.
P/E falls to 10. Market cap is still $5,000,000,000. Earnings are $500,000,000.
Equity, debt and cash on one sheet
Equity is $100,000,000, interest-bearing debt is $40,000,000, surplus cash is $10,000,000, and EBITDA is $10,000,000. What is enterprise value, and what is EV/EBITDA?
- Net debt is debt minus cash: , so $30,000,000.
- Enterprise value is equity plus net debt: , so $130,000,000.
- The same figure the other way: equity plus debt minus cash, .
- EV/EBITDA is .
Enterprise value is $130,000,000. Net debt is $30,000,000. EV/EBITDA is 13 times.
The same EV against a higher EBITDA
Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so enterprise value is still $130,000,000. EBITDA is now $13,000,000. What is the multiple?
- Net debt is still $30,000,000.
- Enterprise value does not move: it is a stock identity, not a flow. It stays $130,000,000.
- EV/EBITDA is .
The multiple is 10 times. Enterprise value is still $130,000,000. Net debt is still $30,000,000. The identity did not change; the denominator did.
Common questions
Which multiple is lower, and does that mean cheaper?
On these two teaching sheets, 13 times sits next to 20 times. They are not the same firm and not the same claim. A gap between them is two fractions.
Can I convert P/E into EV/EBITDA?
Only with a full bridge: add net debt, move from earnings to EBITDA, and match the dates. This page does not invent that bridge.
What if earnings are negative?
P/E stops. EV/EBITDA can still be formed if EBITDA is positive. That is one reason the operations multiple is used on loss-making names, not a reason to treat 13 times as a P/E.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.