EV/EBITDA

EV/EBITDA divides a company enterprise value by its EBITDA, giving a valuation multiple that is neutral to capital structure and tax differences. It is widely used to compare companies and to value acquisition targets. A lower multiple can indicate a cheaper valuation relative to operating cash generation.

Use EV/EBITDA to compare firms with different debt levels more fairly than the P/E ratio allows, and to benchmark against industry peers. What counts as high or low varies by sector, so always compare like with like. Because EBITDA ignores capital spending, supplement it with free cash flow analysis for capital-heavy businesses.

A company with an enterprise value of 1.2 billion dollars and EBITDA of 150 million dollars trades at an EV/EBITDA of 8. If peers trade around 10, the company may be relatively undervalued, assuming similar growth and quality.