Enterprise Value and EV/EBITDA
Enterprise value counts both the shares and the debt of a business. It answers what the entire operation costs, not only its equity slice.
Why this matters for beginners
Two companies can trade at the same earnings multiple while one carries heavy debt. Enterprise value exposes that difference immediately.
Main explanation
Enterprise value is market capitalisation plus net debt. It represents what an acquirer would effectively pay for the whole business.
EV/EBITDA compares that value with operating earnings before depreciation and amortisation, which makes companies with different financing more comparable.
EBITDA has a well-known weakness: it ignores the cost of maintaining assets. For capital-heavy businesses, that omission is material.
Use EV/EBITDA to compare similar businesses, then check capital expenditure separately so the ignored cost does not go unnoticed.
Example using a real company
Two companies each earn 100 of EBITDA. One has no debt and a market value of 800; the other has 400 of debt and a market value of 400. Both cost 800 in enterprise value.
- →Market value 800, net debt 0: enterprise value 800, EV/EBITDA 8.
- →Market value 400, net debt 400: enterprise value 800, EV/EBITDA 8 despite the lower share price.
Common beginner mistakes
- ✕Comparing indebted and debt-free companies on equity multiples only.
- ✕Treating EBITDA as if it were cash flow.
- ✕Comparing EV/EBITDA across unrelated industries.
Key terms
- Enterprise value
- Market capitalisation plus net debt.
- EBITDA
- Earnings before interest, tax, depreciation and amortisation.
- Net debt
- Borrowings minus cash held.
Key takeaways
- 01Enterprise value includes debt, so it values the whole business.
- 02EV/EBITDA improves comparison across capital structures.
- 03EBITDA ignores the cost of maintaining assets.
Check yourself
- 01Enterprise value includes net debt as well as equity value.
- 02EBITDA is a reliable measure of cash flow.
- 03Two companies with different debt levels can share the same enterprise value.
Try the concept on a real company
Study an indebted company in the Analyzer and consider how much of its total enterprise value is debt rather than equity.
Educational examples only. Not buy or sell recommendations.