EV/EBITDA (Enterprise Value to EBITDA) measures a company's total value relative to its earnings before interest, taxes, depreciation, and amortization. It's useful for comparing companies with different capital structures.
Understanding EV/EBITDA
Enterprise Value (EV) = Market Cap + Total Debt - Cash
EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization
EV/EBITDA is preferred over P/E for comparing companies because:
It accounts for debt levels (capital structure neutral)
It removes effects of different depreciation policies
It's useful for comparing companies across countries with different tax rates