EV/EBITDA
A cleaner valuation than P/E because it ignores how the company is financed. Always compared to sector peers and historical median. Software/SaaS commonly trades 25-40x; utilities 10-12x; cyclicals 5-7x. A low EV/EBITDA in a structurally declining business is a value trap, not a bargain.
Formula
(Market Cap + Debt - Cash) / EBITDA = ({marketCap} + {debt} - {cash}) / {ebitda}
Why it matters
The most capital-structure-neutral valuation metric. Unlike P/E, it works the same whether a company is funded by debt or equity, making it ideal for comparing companies with very different balance sheets (e.g., comparing an LBO target to an unlevered peer).
How to read it
Always compare to sector peers and the company's historical median, not a fixed band. Software/SaaS routinely trades 25-40x as a baseline; utilities sit at 10-12x; cyclicals at 5-7x. A low EV/EBITDA in a structurally declining business is a value trap, not a bargain. Negative EBITDA makes this metric meaningless. For capital-light businesses (software), EV/Revenue may be more appropriate. Loughran & Wellman (2011) found EV/EBITDA to be a stronger predictor of future returns than P/E, particularly for capital-intensive industries.
Source
Widely used in LBO analysis since KKR's RJR Nabisco deal (1988). See Burrough, "Barbarians at the Gate."
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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