Below 8x - inexpensive
Often value territory: mature, slower-growth, or out-of-favor businesses. Check why it's cheap before buying.
Definition
What is EV/EBITDA?
EV/EBITDA is enterprise value divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). Because it uses enterprise value - which includes debt - and pre-interest earnings, it compares companies on an apples-to-apples basis regardless of how they are financed. That neutrality is why acquirers, private-equity buyers, and Greenblatt's Magic Formula lean on it instead of P/E.
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Short answer
EV/EBITDA strips out capital structure and tax differences, so it beats P/E for comparing companies with different debt loads or across borders. A lower multiple is cheaper - but EBITDA ignores capex and interest, so never use it without a cash-flow cross-check.
How to read EV/EBITDA
8-12x - fair
A normal range for steady, profitable companies. The broad-market middle ground.
12-18x - premium for growth/quality
Justified by durable growth, high margins, or strong returns on capital.
Above 18x - rich
Demands high, durable growth. Cross-check with FCF yield, since EBITDA flatters capex-heavy firms.
Why it beats P/E for leveraged companies
A company with a $9B market cap and $1B of net debt has a $10B enterprise value. On $1.25B of EBITDA, that's an 8x EV/EBITDA. A P/E on the same business would ignore the debt entirely and could look misleadingly cheap - EV/EBITDA captures the full price a buyer actually pays, equity plus the debt they inherit.
The caveat: Charlie Munger famously dismissed EBITDA for ignoring genuine costs like capital expenditure and interest. Use EV/EBITDA to screen and compare, then confirm with free cash flow yield, which can't be inflated by heavy reinvestment needs.
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Related
- What is enterprise value? - market cap plus net debt - the numerator, and the whole point of the multiple.
- What is EBITDA? - the earnings measure in the denominator, and its real-world caveats.
- What is the Magic Formula? - Greenblatt's use of a cheap EV/EBIT multiple paired with high ROIC.
- What is FCF yield? - the cash-based cross-check EBITDA can't fake.
See valuation that accounts for debt
invest-like shows enterprise-value multiples alongside FCF yield and P/E on every stock, so a debt-heavy balance sheet can't hide behind the equity price.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.