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How EV/EBITDA works

EV/EBITDA is enterprise value over EBITDA. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, EV is $130,000,000. Against $10,000,000 of EBITDA that is 13 times. Against $13,000,000 it is 10 times.

Enterprise value

$130,000,000

13.00 times EBITDA

Equity
$100,000,000
Debt
$40,000,000
Cash
$10,000,000
Net debt
$30,000,000
Enterprise value
$130,000,000
EV / EBITDA
13.00x
$

Figures on this page are in millions of dollars.

$
$
$

Optional. When this is above zero, the multiple is enterprise value over EBITDA.

On this page

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EV/sales

In short

  • Enterprise value is equity plus debt minus cash. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, EV is $130,000,000 and net debt is $30,000,000.
  • EV/EBITDA is that stock over a flow. $130,000,000 / $10,000,000 is 13 times.
  • Zero out the cash and EV becomes $140,000,000. The multiple rises to 14 times. The identity moved. The denominator did not.
  • Hold EV at $130,000,000 and raise EBITDA to $13,000,000. The multiple falls to 10 times. The identity did not move. The denominator did.
  • How enterprise value works owns the stock identity. This page owns the multiple.

A stock over a flow

EV/EBITDA is enterprise value divided by EBITDA. The numerator is a stock: the value of the operations. The denominator is a flow: earnings before interest, tax, depreciation and amortisation.

EV/EBITDA=E+D−CEBITDA\text{EV/EBITDA} = \frac{E + D - C}{\text{EBITDA}}

On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, enterprise value is $130,000,000. Net debt is $30,000,000. Against $10,000,000 of EBITDA the multiple is 13.

The enterprise value calculator on this page is both the identity and the ratio. How enterprise value works owns E+D−CE + D - C. This page owns the division.

The enterprise value explorer holds the claims still and lets you drag a line.

Cash in the numerator moves the multiple

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Cash is now $0. Enterprise value is $140,000,000. The multiple is 14 times.

The $10,000,000 of cash on the first sheet had been worth exactly that much of EV, and exactly one turn of the multiple. Subtracting surplus cash is a claim that the cash is not an operating asset. If it cannot be taken out, do not subtract it, and live with 14 times rather than 13.

EBITDA in the denominator moves the multiple

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. The multiple is 10 times.

The stock did not move. The flow did. A cheaper multiple here is a more profitable year, not a cheaper firm. Sorting a list by EV/EBITDA low to high is a ranking of that ratio, not a bargain screen on its own.

What the 13 times is not

It is not a P/E. P/E uses equity in the numerator and a post-interest profit in the denominator. EV/EBITDA uses operations in the numerator and a pre-interest, pre-tax, pre-depreciation flow in the denominator. P/E against EV/EBITDA is that split. A gap between 13 times and a P/E of 20 is two different fractions, not a trading signal.

It is not free cash flow. EBITDA has not paid tax, not paid capex, and not funded working capital. EBITDA against free cash flow is that bridge. EBIT against EBITDA is the D&A add-back on its own.

It is not a DCF. Two firms can print 13 times for reasons that have nothing to do with being the same business. How DCF works is the cash-flow model this multiple is sometimes used as a shortcut for.

Net debt is the bridge to equity

Enterprise value minus equity value is net debt. On the first sheet that is $30,000,000. A multiple on EV is a multiple on the operations. A multiple on equity is a multiple on what is left after that $30,000,000.

How net debt works is D−CD - C. Net debt against gross debt is why subtracting cash is a claim, not a free lunch. Enterprise value against equity value is the stock split this multiple sits on top of.

What this page is not doing

It is not a full net-debt build, not a comps set, and not a claim that 13 times is cheap or dear. The three sheets are EV of $130,000,000 on $10,000,000 of EBITDA (13 times), EV of $140,000,000 with no surplus cash (14 times), and the first EV against $13,000,000 of EBITDA (10 times). This is educational material, not financial advice.

Worked examples

13 times on the teaching 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 EV/EBITDA?

  1. Net debt is debt minus cash: 40000000−10000000=3000000040000000 - 10000000 = 30000000, so $30,000,000.
  2. Enterprise value is equity plus net debt: 100000000+30000000=130000000100000000 + 30000000 = 130000000, so $130,000,000.
  3. EV/EBITDA is 130000000/10000000=13130000000 / 10000000 = 13.

Enterprise value is $130,000,000. Net debt is $30,000,000. EV/EBITDA is 13 times.

14 times with no surplus cash

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Cash is now $0. What is the multiple?

  1. Net debt is the full $40,000,000, because nothing is subtracted.
  2. Enterprise value is 100000000+40000000=140000000100000000 + 40000000 = 140000000, so $140,000,000.
  3. EV/EBITDA is 140000000/10000000=14140000000 / 10000000 = 14.

Enterprise value is $140,000,000, and the multiple is 14 times. The $10,000,000 of cash on the first sheet had been worth exactly one turn of EV/EBITDA.

10 times on 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?

  1. Enterprise value does not move: it is a stock identity. It stays $130,000,000.
  2. EV/EBITDA is 130000000/13000000=10130000000 / 13000000 = 10.

The multiple is 10 times. Enterprise value is still $130,000,000. The identity did not change. The denominator did.

Common questions

Why not compare EV/EBITDA to a P/E?

Because they are different fractions. EV has debt in the numerator and EBITDA is before interest. P/E has equity in the numerator and earnings are after interest. A gap between 13 times and a P/E of 20 is not a finding about cheapness.

Is 13 times a cheap multiple?

It is $130,000,000 over $10,000,000 on a teaching sheet. Whether that is cheap depends on growth, capex, tax and the sector. The number itself is the ratio, not a verdict.

Is EBITDA cash?

No. It has not paid tax, capex or working capital. Free cash flow on the usual teaching bridge is a different, smaller figure.

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.