EV/EBITDA
$$\text{EV/EBITDA} = \frac{\text{Enterprise Value}}{\text{EBITDA}}$$
What is EV/EBITDA?
EV/EBITDA is a valuation multiple that divides a company's Enterprise Value (EV) by its EBITDA. It answers the question: how many years of current EBITDA would it take to pay the full price of the business? A multiple of 8× means the buyer is paying eight years' worth of current EBITDA.
EV/EBITDA is the most widely used valuation multiple in M&A and private equity. Unlike the Price-to-Earnings (P/E) ratio, EV/EBITDA is capital-structure-neutral — both EV and EBITDA remove the effects of interest and tax, making it valid for comparing companies regardless of their debt levels or tax rates.
The multiple varies significantly by industry, growth rate, and margin profile. High-growth, high-margin businesses (SaaS, pharma) trade at premium multiples. Mature, lower-margin businesses (manufacturing, retail) trade at lower multiples. The appropriate multiple for any business reflects the market's expectation of future EBITDA growth and margin sustainability.
When to use EV/EBITDA
Use EV/EBITDA when valuing a business for acquisition, benchmarking against public market comparables, or assessing exit values in a leveraged buyout model. Always use forward EBITDA (the next twelve months' estimate) for an acquisition context, and trailing EBITDA for historical comparisons.
Worked examples
| Industry | Typical EV/EBITDA range | Key driver of multiple |
|---|---|---|
| SaaS / Cloud Software | 10× – 25× | High growth, high margins, recurring revenue |
| Healthcare services | 10× – 18× | Defensive demand, margin expansion potential |
| Consumer goods | 8× – 14× | Brand value, pricing power |
| Industrial manufacturing | 5× – 9× | Cyclicality, CapEx intensity |
| Grocery / Food retail | 4× – 7× | Thin margins, low growth |
Common pitfalls
EV/EBITDA can be misleading for capital-intensive businesses that require heavy CapEx. Two companies with identical EV/EBITDA ratios but different CapEx requirements are not equally valued — the one with higher CapEx generates less free cash from the same EBITDA. Always also calculate EV/EBIT and EV/FCF to triangulate.
Frequently asked questions
What is a good EV/EBITDA multiple?
It is entirely industry-dependent. 8–12× is considered normal for many mid-market businesses. SaaS and tech can trade at 15–30× in strong markets. There is no universal "good" multiple — always compare against recent transactions and public comparables in the same sector.
Should I use LTM or NTM EBITDA for EV/EBITDA?
In M&A, NTM (Next Twelve Months, i.e. forward) EBITDA is typically used because buyers are paying for future performance. LTM (Last Twelve Months, i.e. trailing) EBITDA is used for historical benchmarking and when forward estimates are unreliable.
How is EV/EBITDA different from P/E?
P/E = Share Price / EPS, using Equity Value and Net Income — both affected by capital structure and taxes. EV/EBITDA is capital-structure-neutral and pre-tax. EV/EBITDA is preferred in M&A; P/E is more common in equity market contexts.