What is EV/EBITDA?
EV/EBITDA shows how many years of EBITDA (earnings before interest, taxes, depreciation, amortization) you're paying for a company. It's better than P/E for comparing companies with different debt levels.
Think of it like this
Two food trucks make $50K profit (EBITDA). Truck A costs $200K to buy (EV/EBITDA of 4). Truck B costs $300K but has $100K in debt, so real cost is $400K (EV/EBITDA of 8). Truck A is the better deal!
Formula
EV/EBITDA = Enterprise Value รท EBITDA- Enterprise Value: Market Cap + Debt - Cash
- EBITDA: Earnings Before Interest, Taxes, Depreciation, Amortization
Why it matters
- Accounts for debt - more accurate than P/E
- Good for comparing companies across industries
- Popular in M&A (mergers and acquisitions)
- Shows true acquisition cost
- Useful for capital-intensive businesses
What's a good value?
< 8
Undervalued
Potentially cheap acquisition
8-12
Fair Value
Reasonable valuation
12-15
Premium
Paying extra for quality or growth
> 15
Expensive
Very high expectations or overvalued
Real-world example
Amazon EV/EBITDA: 18 - premium for growth. Walmart EV/EBITDA: 9 - mature business. Tech startups: 20+ - betting on future profitability.
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