Investingg.in Learn
What Is EV/EBITDA? Enterprise Value Formula and Example
EV/EBITDA compares a company's total value, including debt, with its operating earnings. Learn enterprise value, the formula and how to use the multiple.
EV/EBITDA in 60 seconds
- EV/EBITDA compares what it would cost to buy the whole business (including its debt) with the operating profit it generates.
- Formula: enterprise value ÷ EBITDA, where EV = market cap + debt − cash.
- Because it accounts for debt, it is fairer than P/E when comparing companies with different capital structures.
Educational summary — not investment advice.
The P/E ratio looks only at the price of the shares. But if you bought a whole company, you would also take on its debt — and get its cash. Enterprise value (EV) adds those in to give the true price of the business.
EV/EBITDA then divides that price by operating earnings, telling you how many years of EBITDA it would take to pay for the business.
How is EV/EBITDA calculated?
| Measure | Formula |
|---|---|
| Enterprise value (EV) | Market cap + Total debt + Preference capital + Minority interest − Cash |
| EV/EBITDA | Enterprise value ÷ EBITDA |
Debt is added because a buyer inherits it; cash is subtracted because a buyer can use it to repay debt. Preference capital and minority interests are added because they are claims on the business that are not counted in the market cap.
EV/EBITDA example with numbers
| Item | Value |
|---|---|
| Market capitalisation | ₹10,000 crore |
| + Total debt | ₹2,000 crore |
| − Cash | ₹500 crore |
| Enterprise value | ₹11,500 crore |
| EBITDA | ₹1,000 crore |
| EV/EBITDA | 11.5x |
The whole business is valued at ₹11,500 crore — ₹1,500 crore more than its market cap because of net debt. Against ₹1,000 crore of EBITDA, that is 11.5x.
Example Ltd — illustrative figures.
When EV/EBITDA is better than P/E
- Comparing companies with different debt levels: EV includes debt, so leverage does not distort the multiple.
- Capital-intensive businesses where depreciation is large and can swamp net profit.
- Takeovers: acquirers think in terms of enterprise value because they take on the target's debt.
- Companies with temporary low or negative profits, where P/E breaks down.
Limitations
EBITDA ignores capital expenditure, so a business that must keep investing heavily can look cheaper than it is. The multiple also varies a lot by sector, so compare only within the same industry, and pair it with free cash flow.
The price of the whole business, not just its shares
Imagine you want to buy an entire company, not a few shares. You would pay the current value of its equity, but you would also take over its debt, and you would get to keep whatever cash it holds. The total you would really be paying for the operating business is called enterprise value.
The P/E and price-to-book ratios only look at the equity. That is fine when two companies are funded in a similar way, but it breaks down when one is debt-free and the other is heavily borrowed. EV/EBITDA fixes the mismatch by putting debt and cash into the price, and matching it with EBITDA, a profit figure that is also measured before interest. Price and profit now describe the same thing: the whole operating business.
Building enterprise value step by step
- Start with market capitalisation: current share price × shares outstanding.
- Add borrowings: short-term and long-term loans, bonds and debentures. Many analysts also add lease liabilities.
- Subtract cash and liquid investments: cash, bank balances and easily sold investments.
- Add other claims: minority interest (outside shareholders' share of subsidiaries) and preference capital.
Suppose a company has a market cap of ₹8,000 crore, borrowings of ₹1,500 crore, lease liabilities of ₹200 crore, cash of ₹700 crore and minority interest of ₹300 crore. Enterprise value is 8,000 + 1,500 + 200 − 700 + 300 = ₹9,300 crore. If EBITDA is ₹900 crore, EV/EBITDA is 9,300 ÷ 900 = 10.3 times.
Why the same market cap can hide very different prices
Take two companies, each with a market cap of ₹6,000 crore and EBITDA of ₹800 crore. Company A has no debt and ₹0 net debt. Company B has net debt of ₹3,000 crore.
| Measure | Company A / Company B |
|---|---|
| Market capitalisation | ₹6,000 crore / ₹6,000 crore |
| Net debt | ₹0 / ₹3,000 crore |
| Enterprise value | ₹6,000 crore / ₹9,000 crore |
| EBITDA | ₹800 crore / ₹800 crore |
| EV/EBITDA | 7.5 times / 11.25 times |
On market cap and EBITDA alone the two look identical. But whoever buys Company B must also stand behind ₹3,000 crore of debt, so B is really the more expensive purchase. EV/EBITDA makes that visible: 11.25 times versus 7.5 times for the same operating profit.
How to interpret the multiple
Like any multiple, EV/EBITDA means something only in context. Broad guidelines that help:
- Compare within a sector. Cement, telecom, hospitals and consumer companies each have very different normal ranges because their growth and capital needs differ.
- Compare with the company's own history. A multiple at the top of its five- or ten-year range means the market already expects a lot.
- Consider growth and returns. A higher multiple is easier to justify for a company growing EBITDA quickly with a high ROCE.
- Watch the cycle. For cyclical companies, EBITDA peaks make the multiple look low just before profits fall.
A lower multiple does not automatically mean a bargain, and a higher one does not automatically mean expensive. It means investors are paying fewer or more rupees for each rupee of operating profit, and you must ask why.
Where EV/EBITDA can mislead
- Capital spending is ignored. Two companies with the same EBITDA can need very different amounts of capex. Pair the multiple with EV to free cash flow or EBITDA minus capex.
- Lease accounting. Under Ind AS 116, most lease costs move out of operating expenses and into depreciation and interest, which lifts EBITDA. Compare companies using the same treatment.
- Cash that is not really spare. Cash held for regulatory needs or trapped in subsidiaries cannot be used to pay down debt.
- Financial companies. Banks, NBFCs and insurers should not be valued on EV/EBITDA, since debt is part of their business.
- Unusual EBITDA. One-off gains or losses distort the denominator. Use recurring EBITDA.
Takeovers and EV/EBITDA
When one company acquires another, the price is often described as a multiple of EBITDA because the buyer takes on the target's debt and cares about its operating profit, not its dividend record. If similar businesses have changed hands at around 10 times EBITDA in the past, that gives a rough sense of what the market considers a full price for the whole operation.
You can turn this around for a listed company: if the shares trade at 7 times EBITDA while a sector takeover benchmark is 10 times, either the market doubts the growth or the company is unusually cheap. It is a prompt to investigate, not a conclusion.
Test yourself
- Question 1. Market cap ₹5,000 crore, debt ₹1,200 crore, cash ₹400 crore. Enterprise value? Answer: 5,000 + 1,200 − 400 = ₹5,800 crore.
- Question 2. With EBITDA of ₹725 crore, what is EV/EBITDA? Answer: 5,800 ÷ 725 = 8.0 times.
- Question 3. If EV stays at ₹9,000 crore but EBITDA grows 20% from ₹750 crore to ₹900 crore, how does the multiple change? Answer: it falls from 12.0 times to 10.0 times.
Continue with EBITDA for the profit measure behind the multiple and free cash flow for the cash left after the spending EBITDA ignores.
On NSE and BSE: what to keep in mind
- Net debt should include all borrowings less cash and liquid investments — check that the data site treats these the same way for every company before comparing.
- Sector multiples differ hugely across NSE sectors: compare cement with cement and telecom with telecom.
- EV/EBITDA is not used for banks, NBFCs and insurers.
EV/EBITDA: frequently asked questions
What is a good EV/EBITDA?
It depends on the industry and growth. Compare the multiple with sector peers and the company's own history rather than using a fixed cut-off.
Why subtract cash from enterprise value?
Because a buyer effectively gets that cash with the company and can use it to repay debt, lowering the real price paid.
Is EV/EBITDA used for banks?
No. For banks, debt is part of operations, so enterprise-value multiples are not meaningful. Use P/B and P/E instead.
Disclaimer: this article is for education only. The figures in the worked example are illustrative and do not describe any real company listed on NSE or BSE. It is not investment advice, and investingg.in is not a SEBI-registered advisor.
The bottom line
EV/EBITDA prices the whole business, debt and all, against its operating earnings. It levels the field between companies with different balance sheets — read it alongside cash flow.
Want to put this into practice? Record each trade, review your win rate and see where your discipline slips — start a free trading journal on investingg.in.
Disclaimer: This analysis is for educational purposes only and should not be considered investment or trading advice. Please consult your financial advisor before making investment decisions.