What is enterprise value (EV)?

Market capitalization is the price of all the shares. Enterprise value adds what the company owes to lenders and takes away the cash it holds: EV = market cap + debt − cash. The logic is that of a buyer of the whole company, who pays the shareholders, takes over the debt, and receives the cash in the till, which lowers the net price.

The CFA Institute’s curriculum defines enterprise value as the market value of debt, common equity and preferred equity, minus cash and investments. In practice debt is usually taken from the balance sheet at book value, cash includes short-term investments, and many data providers also add preferred stock and minority interests, the stakes other owners hold in subsidiaries. That is why two websites can show slightly different EVs for the same company. For XYZ:

  1. Market cap: 20 million shares × $25.00 = $500 million.
  2. Add debt: $500 million + $390 million = $890 million.
  3. Subtract cash: $890 million − $50 million = $840 million of enterprise value.
  4. Net debt is debt minus cash: $390 million − $50 million = $340 million, so EV is also market cap + net debt = 500 + 340 = $840 million.
Enterprise value (EV)
Market capitalization plus debt, minus cash and short-term investments; fuller versions also add preferred stock and minority interests. It estimates the price of the whole business, for shareholders and lenders together.
Net debt
Total debt minus cash and short-term investments. A company with more cash than debt has negative net debt, and its enterprise value is below its market cap.

What is EBITDA, and how do you calculate it?

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a rough measure of what the operations earn before the cost of the company’s financing (interest), before tax, and before the accounting charges that spread the cost of long-lived assets over the years (depreciation and amortization).

There are two routes to it on the income statement, and they should agree. Start from net income and add back taxes, interest, and depreciation and amortization; or start from operating income (EBIT) and add back depreciation and amortization, which you will often find on the cash flow statement. For XYZ, as in the drawing below: net income $40 million + taxes $10 million + interest $20 million = EBIT of $70 million, and $70 million + depreciation and amortization of $30 million = EBITDA of $100 million.

EBITDA is not defined by accounting standards, so companies report it as a non-GAAP measure. The SEC’s staff guidance says a figure labeled EBITDA should start from net income as reported under GAAP and be reconciled to it, that a version with further adjustments should carry a different name such as “adjusted EBITDA”, and that EBITDA must not be shown per share. When a company removes more costs, such as stock-based pay or restructuring, read the reconciliation table to see what was taken out.

EBITDA
Earnings before interest, taxes, depreciation and amortization: net income with those four items added back. A non-GAAP measure of operating earnings before financing, tax and the write-down of long-lived assets.
EBIT
Earnings before interest and taxes. Close to operating income on most income statements; unlike EBITDA, it is after depreciation and amortization.
Adjusted EBITDA
EBITDA with further items removed by the company, such as stock-based compensation or restructuring costs. Each company chooses its own adjustments, so compare the reconciliations, not the labels.

Turn your phone sideways to read the image. Tap to close.

A waterfall for hypothetical XYZ, one year, in $ millions: net income 40 in gray, green steps of +10 taxes, +20 interest and +30 depreciation and amortization, and EBITDA 100 in gray. A dashed line marks EBIT 70 at the top of the interest step, and a line above reads 40 + 10 + 20 + 30 = 100.

How do you calculate EV/EBITDA, and what is a good EV/EBITDA?

Divide enterprise value by EBITDA for the same company, using the last twelve months of EBITDA (trailing) or the analysts’ estimate for the coming year (forward). For XYZ: $840 million ÷ $100 million = 8.4. Read it as a price tag: the whole business costs 8.4 times what its operations earn in a year before interest, taxes, depreciation and amortization. It is not a payback period, because EBITDA is not cash the owners can keep.

There is no single good number. A higher multiple usually goes with faster expected growth, higher returns on capital or lower risk, and a lower one with slow growth, heavy capital needs or cyclical profits. The drawing below shows EV/EBITDA by US industry from data as of January 2026 compiled by Aswath Damodaran of NYU Stern, for companies with positive EBITDA: telecom services 6.54, air transport 7.58, integrated oil and gas 8.16, general utilities 13.73, the whole market excluding financial companies 16.95, system and application software 24.48 and semiconductors 34.75. Compare a company with its own industry and its own history, not with the market average.

Turn your phone sideways to read the image. Tap to close.

Seven bars of EV/EBITDA by US industry for companies with positive EBITDA, January 2026 data compiled by Aswath Damodaran, NYU Stern: telecom services 6.54, air transport 7.58, integrated oil and gas 8.16, general utilities 13.73, the whole market excluding financials 16.95, highlighted in yellow, system and application software 24.48 and semiconductors 34.75.

EV/EBITDA vs P/E: what is the difference?

The P/E ratio compares the price of the shares with the profit left for shareholders after interest and tax. EV/EBITDA compares the price of the whole business with its earnings before interest and tax. So P/E changes with how a company is financed, and EV/EBITDA mostly does not. The CFA Institute’s curriculum makes the same point: EV/EBITDA may be more appropriate than P/E for comparing companies with different amounts of debt.

The drawing below puts XYZ beside hypothetical ABC, which runs the same business with no debt and no cash. Both have EBITDA of $100 million and an enterprise value of $840 million, so both trade at 8.4 times EBITDA. XYZ pays $20 million of interest and earns $40 million; its market cap is $500 million, a P/E of 500 ÷ 40 = 12.5. ABC pays no interest, so at the same 20% tax rate it earns $56 million; its market cap equals its EV, $840 million, a P/E of 840 ÷ 56 = 15.0. On P/E, XYZ looks cheaper. It is the same business at the same price: the lower P/E reflects the debt, which makes its shareholders’ profit more sensitive to a bad year.

P/E still has uses that EV/EBITDA lacks. It includes interest, tax and depreciation, all real costs, and it is the natural ratio for banks and insurers, where debt is raw material and EBITDA has little meaning.

Turn your phone sideways to read the image. Tap to close.

Two cards in $ millions for the same business financed two ways. XYZ, financed partly with debt: EBITDA 100, interest 20, net income 40, market cap 500, enterprise value 840, EV/EBITDA 8.4 in green, P/E 12.5 in red. ABC, no debt and no cash: EBITDA 100, interest 0, net income 56, market cap 840, enterprise value 840, EV/EBITDA 8.4 in green, P/E 15.0 in red. A note reads same business, same EV/EBITDA: only the debt changes the P/E.

Where does EV/EBITDA mislead?

EBITDA leaves out depreciation, but the assets behind it wear out and must be replaced with real cash, the capital expenditures (capex). Two hypothetical companies in the drawing below each have EBITDA of $100 million and an enterprise value of $840 million, 8.4 times EBITDA. The asset-light one spends $16 million a year on capex and has $84 million left: its EV is 840 ÷ 84 = 10.0 times EBITDA minus capex. The capex-heavy one spends $70 million and has $30 million left: 840 ÷ 30 = 28.0 times. Real data show the same gap: in Damodaran’s January 2026 figures, US air transport companies trade at 7.58 times EBITDA but 19.32 times EBIT, because depreciation takes more than half of their EBITDA. For capital-heavy businesses, check EV/EBIT and free cash flow alongside EV/EBITDA.

Leases are a second trap. Under IFRS 16, a lessee records nearly all leases as a liability, and rent no longer appears as an operating cost: it becomes depreciation and interest, so EBITDA is higher. Under US GAAP, operating leases are also recorded as a liability, but their cost stays in operating expenses, so EBITDA is lower. The IASB’s own analysis of the effects of IFRS 16 expected EBITDA to be notably higher under IFRS than under the US model. Hypothetical: a retailer with EBITDA of $100 million after $20 million of rent has EBITDA of $120 million once rent is excluded. Dividing the old EV of $840 million by the new EBITDA gives 7.0, which looks cheaper but mixes two definitions. Adding its lease liabilities of $120 million to EV gives 960 ÷ 120 = 8.0. Whatever the accounting, lease debt belongs in EV whenever rent is left out of EBITDA.

Other cases to watch:

  • Negative or tiny EBITDA: the ratio is negative or huge and says nothing. Use EV to sales, and ask when the company expects to earn money.
  • Adjusted EBITDA: the more costs a company removes, the lower the multiple looks. Stock-based pay is a real cost to shareholders even if it is not paid in cash.
  • Mismatched dates: EV uses today’s share price and the latest balance sheet, EBITDA the last twelve months. A big acquisition or sale in between distorts the ratio.
  • Banks and insurers: interest is their core business, so analysts use P/E and price-to-book instead.
  • Cash that is not really spare: cash needed to run the business, or held abroad or in a subsidiary the company only partly owns, lowers EV on paper more than it should.

Turn your phone sideways to read the image. Tap to close.

Two bars for two hypothetical companies, in $ millions, each with EBITDA of 100, an enterprise value of 840 and EV/EBITDA 8.4. Asset-light: capex 16 hatched orange at the top, 84 left after capex in green, and 840 ÷ 84 = 10.0. Capex-heavy: capex 70 hatched orange, 30 left after capex in green, and 840 ÷ 30 = 28.0 in red. A note reads EV ÷ (EBITDA − capex): the same 8.4 hides very different cash.

How to use EV/EBITDA in practice

Treat EV/EBITDA as a first comparison, then test it against cash. A short routine:

  1. Build EV yourself once: market cap, plus debt and lease liabilities, minus cash. Check which items your data source includes.
  2. Check which EBITDA is used: reported or adjusted, trailing or forward. Read the reconciliation to net income.
  3. Compare with direct competitors and with the company’s own multiples in past years, not with the whole market.
  4. Look at what EBITDA ignores: capex, interest, taxes and changes in working capital. Net debt ÷ EBITDA shows how many years of EBITDA the debt represents: 340 ÷ 100 = 3.4 for XYZ.
  5. Ask why the multiple is low or high. A low EV/EBITDA can signal a shrinking business, the value trap, as easily as a bargain.
Net debt to EBITDA
Net debt divided by EBITDA, a common measure of leverage. A reading of 3.4 means net debt equals 3.4 times one year of EBITDA.