EV/EBITDA: formula and how to read it

Whole-company price vs. operating cash earnings. Enterprise value (market capitalization plus debt minus cash) divided by trailing twelve-month EBITDA. Negative EBITDA ranks below every positive figure, and never passes an EV/EBITDA filter.

Stock Meadow groups it under Valuation.

EV/EBITDA = enterprise value ÷ EBITDA over the trailing twelve months, where enterprise value = market capitalization + debt − cash

A company worth $800 million on the stock market, with $300 million of debt and $100 million of cash, has an enterprise value of $1,000 million. If its EBITDA is $125 million, EV/EBITDA is 8.0. The numbers are made up for illustration.

A lower multiple means a lower price for each dollar of operating earnings. As with other multiples, compare within an industry, because capital-heavy and asset-light businesses sit at different levels.

When Stock Meadow ranks stocks, a lower figure scores better.

• EBITDA ignores depreciation and capital spending, so a business that must keep spending heavily to stand still can look cheaper than it is.
• Negative EBITDA has no meaningful multiple. Stock Meadow ranks it below every positive figure and never lets it pass an EV/EBITDA filter.
• Banks and insurers get no EV/EBITDA, because debt is part of how they operate.

How Stock Meadow handles gaps. Usually blank when EBITDA or enterprise value isn't available. A negative figure shows as Negative EBITDA, ranks below every positive figure and never passes a filter.

Treat any single metric as one clue, and read the company's financial statements before drawing a conclusion. Stock Meadow's figures are research tools based on reported data, not investment advice.

Fixed-recipe models that score it: Trending Value (O'Shaughnessy).

In Weighted ranking, Z-score composite and Balanced (no weak link), you choose the metrics and weights yourself, so you can include it in a custom score.

Read about every scoring model on the scoring models page.

• P/E Ratio (Price-to-Earnings): what you pay for each dollar of profit.
• Net Debt to EBITDA: years of earnings needed to pay off debt.
• Earnings Yield: operating profit for each dollar of the whole company.
• Price-to-Free-Cash-Flow (P/FCF): what you pay for each dollar of spare cash.

Why use EV/EBITDA instead of the P/E ratio?

Enterprise value includes debt, so the multiple is not distorted by how a company is financed. EBITDA is also less affected by differences in depreciation and tax. It leaves out capital spending, so use it alongside cash-flow measures.

Is a higher or lower EV/EBITDA better?

When Stock Meadow ranks stocks, a lower figure scores better. That is a ranking convention, so read EV/EBITDA alongside other measures and compare similar companies.

Why is EV/EBITDA blank for some stocks?

It is usually blank when EBITDA or enterprise value isn't available. Stock Meadow leaves the figure blank rather than guessing it.