EV/EBITDA

EV/EBITDA is enterprise value divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). By putting debt in the numerator and pre-interest earnings in the denominator, it values the whole business rather than just the equity, which makes companies with different debt loads comparable.

The math

A business with a 5 billion dollar enterprise value and 625 million of EBITDA trades at 8 times EV/EBITDA. Now compare it to a rival at a P/E of 12 that looks cheaper: if that rival carries heavy debt, its EV/EBITDA might be 11, revealing it as the more expensive purchase once you count what the buyer assumes.

	This company	Leveraged rival
P/E	above 12	12
EV/EBITDA	8x	11x
Honest verdict	cheaper	more expensive

Same companies, opposite verdicts, and the EV-based one is the honest ranking.

The trap

Forgetting what EBITDA ignores. Depreciation is a real cost in any business that owns machines, trucks, or data centers: the equipment wears out and must be replaced with real dollars.

Valuing capital-intensive companies on EV/EBITDA flatters them structurally, which is why the metric became the favorite currency of debt-fueled acquisitions and optimistic pitch decks.

The move

Use EV/EBITDA to compare leverage-heavy sectors and cross-border companies where tax and depreciation rules differ. Then reality-check it against EV to free cash flow, where capex has to be paid.

A company that looks cheap on EBITDA and expensive on free cash flow is telling you its profits live upstream of its biggest bills.