EV/EBITDA

Enterprise value is market capitalisation plus net debt: what it would cost to acquire the company outright, since a buyer takes on the borrowings and receives the cash. EBITDA is earnings before interest, tax, depreciation and amortisation. Dividing one by the other asks what you are paying for each dollar of operating profit before financing and accounting choices.

The reason to prefer it over a P/E is that both halves are consistent. A P/E compares the equity value against profit measured after interest, so two identical businesses financed differently produce different P/E ratios. EV/EBITDA strips the financing decision out of both the numerator and the denominator, which is why it is the standard multiple in acquisitions and the usual way to compare companies with very different debt loads.

Adding back depreciation treats the wearing out of assets as if it were not a cost. For a software company with few physical assets that is close to harmless. For an airline, a telecom operator or a manufacturer, the aircraft and the network and the machines genuinely do wear out, and the money to replace them is not optional.

This is why EBITDA has a poor reputation among some investors: it is the profit figure that flatters capital-intensive businesses most, and it flatters them precisely where the flattery is least deserved. The well-known objection, that it means earnings before the costs you would rather not think about, is unfair as a general rule and fair often enough to be worth remembering.

It also ignores interest, which is a real payment a leveraged company must make, and tax, which is real too. A company can have healthy EBITDA and still not generate enough cash to service its debt.

It is at its most useful comparing companies in the same industry with different capital structures, or valuing a business that is loss-making after depreciation but genuinely cash-generative before it. It is also the natural multiple when the question is what an acquirer would pay, because an acquirer really does assume the debt.

Pairing it with net debt to EBITDA, which the screener carries alongside, answers the question the multiple alone cannot: how much of the enterprise value is borrowed, and whether the operating profit comfortably covers it. A low EV/EBITDA on a company at five times net debt is a different proposition from the same multiple on one with no borrowings.

Comparisons across industries are close to meaningless, for the same reason as with P/E: capital intensity, growth and durability differ structurally, and the multiple is measuring all three at once.

Be wary too of adjusted EBITDA in company presentations. The unadjusted figure is defined; adjusted versions add back whatever management considers unrepresentative, and restructuring charges that recur every year for a decade are not unrepresentative. Where the two differ materially, the gap itself is the interesting number.