EV/EBITDA
EV/EBITDA (Enterprise Value to EBITDA) is a valuation multiple that compares a company's total enterprise value — equity plus net debt — to its EBITDA, offering a capital-structure-neutral view of valuation.
Enterprise Value (EV) equals market capitalisation plus total debt minus cash and cash equivalents. Dividing EV by EBITDA gives a multiple that effectively answers: if someone were to acquire the entire business, how many years of current EBITDA would the price represent? A lower EV/EBITDA generally suggests a cheaper valuation, but the appropriate level varies significantly by industry.
In India, EV/EBITDA became the preferred valuation metric in sectors where net profit is distorted by high depreciation or interest costs. The cement industry is a classic example: large plants generate substantial depreciation, making P/E ratios hard to compare. Analysts instead looked at EV per tonne of capacity and EV/EBITDA to compare players like UltraTech Cement, Shree Cement, and ACC on a level footing. Similarly, for Bharti Airtel and Vodafone Idea during the telecom price war period, net profit was negative but EV/EBITDA still indicated relative valuations.
The inclusion of net debt in EV is what makes this metric superior to P/E for comparing leveraged and unleveraged companies. Consider two companies with identical EBITDA: one is debt-free and the other carries ₹5,000 crore of debt. Their EV is different by that ₹5,000 crore, and therefore their EV/EBITDA multiples reflect the true cost of acquiring each business — including the obligation to repay or assume the debt.
A subtlety in Indian accounting: some companies hold large non-operating investments (promoter-pledged shares, strategic stakes) or have significant minority interests. These adjustments to EV are often debated by analysts. For conglomerates like Bajaj Holdings or investment holding companies, the sum-of-the-parts (SOTP) method — which computes EV/EBITDA for each subsidiary separately — is preferred over a consolidated multiple.
Investors should always compare a company's EV/EBITDA against its own historical range and against sector peers simultaneously. A company trading at 10x EV/EBITDA may look cheap if the sector average is 15x, but expensive if it has historically traded at 6x. Context from both time series and cross-sectional comparisons is essential.