Two different questions
Market capitalization prices only the equity claim — shareholders. Enterprise value (EV) prices the whole business: equity plus debt, net of cash, since an acquirer of the whole company would take on its debt but also gain its cash. P/E pairs share price with per-share earnings, an equity-only figure; EV/EBITDA pairs enterprise value with EBITDA, a figure available to all capital providers, not just shareholders. Pairing an all-capital numerator with an all-capital denominator is what keeps EV/EBITDA consistent across companies with different debt levels.
P/E, worked
The P/E ratio divides share price by earnings per share. A share priced at $150 with EPS of $6 trades at a P/E of 150 ÷ 6 = 25 — investors are paying $25 for each $1 of annual earnings. The reciprocal, earnings yield, is 6 ÷ 150 = 4%, sometimes compared against bond yields as a rough gauge of relative valuation.
EV/EBITDA, worked
Enterprise value adds market capitalization and total debt, then subtracts cash: a company with a $500 million market cap, $120 million of debt, and $40 million of cash has an EV of 500 + 120 − 40 = $580 million. Against $72.5 million of EBITDA, the EV/EBITDA multiple is 580 ÷ 72.5 = 8.0x, meaning the business is priced at eight years of its current EBITDA. The implied EBITDA yield — the reciprocal — is 72.5 ÷ 580 = 12.5%.
- Enterprise value = market cap + debt − cash → $500M + $120M − $40M = $580M
- EV/EBITDA = EV ÷ EBITDA → $580M ÷ $72.5M = 8.0x
- P/E = share price ÷ EPS → $150 ÷ $6 = 25
- Earnings yield = EPS ÷ share price → $6 ÷ $150 = 4%
Why EV/EBITDA is preferred for capital-structure comparisons
EV/EBITDA is popular in mergers and acquisitions and when comparing capital-intensive or leveraged companies, because it's neutral to capital structure: interest expense doesn't affect EBITDA, and debt is already included in enterprise value. It also sidesteps differences in depreciation schedules and tax rates that distort P/E comparisons, and it remains usable when net income is negative but EBITDA is positive — P/E is undefined for loss-making companies.
EBITDA is a non-GAAP measure, though — it isn't defined by accounting standards, and the U.S. Securities and Exchange Commission requires companies presenting it to reconcile it to the nearest GAAP figure. Analysts should confirm how a company defines EBITDA and whether 'adjusted EBITDA' figures have excluded genuinely recurring costs, which would flatter the multiple.
Where each multiple falls apart
Both multiples are only meaningful relative to industry peers, a company's own history, and its growth and capital-intensity profile — typical levels for either multiple vary persistently by industry, so cross-industry comparisons of either one generally mislead. EBITDA excludes capital expenditure entirely, so two companies with an identical EV/EBITDA can have very different free cash flow if one must reinvest heavily to maintain its assets. Reported EPS, meanwhile, is an accounting figure that one-time items, buybacks, and accounting choices can distort in a single period.
Perguntas frequentes
What does an EV/EBITDA of 8 mean?
An EV/EBITDA of 8.0x means the total value of the business — equity plus debt, net of cash — equals eight years of its current EBITDA. An enterprise value of $580 million against $72.5 million of EBITDA produces a multiple of 8.0x, equivalent to a 12.5% EBITDA yield.
What does a P/E ratio of 25 mean?
A P/E of 25 means investors are paying $25 for every $1 of annual earnings per share — a $150 share price against $6 of EPS, for example. The equivalent earnings yield is 4%.
Why use EV/EBITDA instead of P/E?
EV/EBITDA compares the value of the whole business to earnings available to all capital providers, so it's unaffected by how much debt a company carries, tax-rate differences, or depreciation-policy differences that all distort P/E comparisons. This makes it especially useful for leveraged, capital-intensive, or internationally domiciled companies, and it stays usable when net income is negative but EBITDA is positive.
Why can't P/E be calculated for a loss-making company?
P/E divides price by earnings per share, and when earnings are zero or negative the ratio is undefined or produces a negative number with no meaningful valuation interpretation. Analysts typically turn to EV/EBITDA or price-to-sales for loss-making companies instead.
Is EBITDA a GAAP measure?
No. EBITDA is a non-GAAP financial measure not defined by accounting standards, and companies calculate it in varying ways. The SEC requires companies that present non-GAAP measures like EBITDA in filings to reconcile them to the most directly comparable GAAP measure.
Referências
- U.S. Securities and Exchange Commission. Non-GAAP financial measures — compliance and disclosure interpretations. sec.gov.
- CFA Institute. Market-Based Valuation: Price and Enterprise Value Multiples — CFA Program Curriculum. cfainstitute.org.
- Damodaran A. Price Earnings Ratios and Enterprise Value Multiples. New York University Stern School of Business. pages.stern.nyu.edu/~adamodar.
- Graham B, Dodd D. Security Analysis. McGraw-Hill (multiple editions since 1934).