MarketLearn
Chapter 29Advanced~10 min

A financing-neutral multiple

Why EV/EBITDA lets you compare debt-heavy and cash-rich firms.

A valuation multiple compares the price of something to a measure of what it earns. The most common one for comparing whole businesses is EV/EBITDA.

EV/EBITDA = Enterprise value ÷ EBITDA

EBITDA stands for earnings before interest, tax, depreciation and amortisation. Think of it as a rough measure of the cash generated by operations before accounting charges such as depreciation.

Why is this multiple described as 'financing-neutral'? Because enterprise value includes debt, while EBITDA excludes interest. The interest a company pays — which depends on how much it borrowed — does not affect either number. That lets you compare a debt-heavy company with a cash-rich one.

Company (fictional)Enterprise valueEBITDAEV/EBITDA
Sunrise Textiles Ltd₹5,500 Cr₹500 Cr11.0×
Zenith Software Ltd₹3,000 Cr₹300 Cr10.0×

Expressed as a multiple ('times'), EV/EBITDA lets you compare businesses of different sizes.

EV / EBITDA

A valuation multiple that is independent of how the business is financed.

EV / EBITDA = Enterprise Value ÷ EBITDA

Enterprise Value

₹5,300 Cr

EV / EBITDA

10.6x

Because EV/EBITDA sits above interest and tax, it lets you compare a heavily indebted company with a debt-free one. It still ignores capital expenditure, which can be large for capital-intensive businesses — so pair it with a look at cash flow.
Because EBITDA is before interest, tax, depreciation and amortisation, it is closer to operating cash earnings than net profit. But 'closer' is not the same as 'the same' — that is the subject of the next lesson.

A higher multiple means the market is paying more for each rupee of EBITDA. A lower multiple means it is paying less. Whether a multiple is high or low is best judged against similar companies and the company's own history.

No multiple, on its own, tells you whether a share is cheap or expensive. A company can deserve a high multiple for good reasons, or a low one for poor reasons. Multiples are tools for comparison, not verdicts.
EV/EBITDA is a starting point for comparison. It is most useful when applied to similar businesses in the same industry.

Key takeaways

  • EV/EBITDA = enterprise value ÷ EBITDA.
  • EBITDA is earnings before interest, tax, depreciation and amortisation.
  • Because EV includes debt and EBITDA excludes interest, the multiple is financing-neutral.
  • A multiple is a tool for comparison, not a verdict on value.

Check your understanding

Every answer comes with an explanation — the goal is understanding, not a score.

Question 1 / 40%

A company has an enterprise value of ₹6,000 crore and EBITDA of ₹600 crore. What is its EV/EBITDA?

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