What Is Forward P/E? Definition and Example
What the forward price-to-earnings ratio is, how it differs from trailing P/E, and why it is only as good as the estimate behind it.
GlossaryGlossary
What Is EV/EBITDA? Definition and Example
What the EV/EBITDA multiple measures, how to calculate enterprise value and EBITDA, and when it beats the P/E ratio for comparing companies.
Key takeaways
- EV/EBITDA is a valuation multiple: a company’s enterprise value (equity plus debt minus cash) divided by its EBITDA (earnings before interest, taxes, depreciation and amortization).
- Because it includes debt, it compares companies with different borrowing levels more fairly than the P/E ratio.
- A lower multiple means a cheaper price for each dollar of operating profit, all else equal.
- EBITDA ignores the cost of replacing equipment, so the multiple can flatter capital-heavy businesses.
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What is EV/EBITDA?
EV/EBITDA asks what it would cost to buy the whole business, debts included, relative to the operating profit it produces. The P/E ratio only looks at the shares; EV/EBITDA looks at the whole capital structure.
How do you calculate EV/EBITDA?
- Enterprise value (EV) = market capitalization + total debt − cash
- EBITDA = operating profit + depreciation + amortization
- EV/EBITDA = EV ÷ EBITDA
Worked example
Illustrative: two companies with the same market cap and the same EBITDA.
| Measure | Company A | Company B |
|---|---|---|
| Market capitalization | $10.0B | $10.0B |
| Debt | $0 | $5.0B |
| Cash | $1.0B | $0.5B |
| Enterprise value | $9.0B | $14.5B |
| EBITDA | $1.0B | $1.0B |
| EV/EBITDA | 9.0x | 14.5x |
On market cap alone they look identical. Including debt, B is far more expensive for the same operating profit.
Why it matters for a self‑directed investor
A company can look cheap on forward P/E while carrying heavy debt, for example after borrowing to buy back shares. EV/EBITDA exposes that. Pair it with free cash flow, which counts the capital spending that EBITDA leaves out. See value traps.
Common mistakes
- Comparing EV/EBITDA across industries with very different capital needs.
- Using “adjusted” EBITDA that adds back recurring costs.
- Applying it to banks and insurers, where debt is part of the business itself.
Frequently asked questions
It depends on the industry and growth rate. Compare a company with close peers and with its own history rather than with a fixed number.
It includes debt and cash, so it compares companies with different borrowing levels more fairly, and it is not affected by interest or tax differences.
Yes, if EBITDA is negative (operating losses) or if cash exceeds market cap plus debt. A negative multiple is usually not meaningful for valuation.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.