MarketLearn
Chapter 29Advanced~9 min

Limitations of EV/EBITDA

It ignores capital expenditure and changes in working capital.

EBITDA has a reassuring name, but it leaves out two things that matter a great deal: capital expenditure and changes in working capital. Both can consume large amounts of cash.

It ignores capital expenditure

Capital expenditure (capex) is money spent on long-term assets — factories, machines, vehicles, technology. Businesses that need heavy capex, such as a cement maker or an airline, must keep spending just to maintain and grow. EBITDA does not subtract any of that.

Company (fictional)EBITDACapexEBITDA − capex
Everest Steels Ltd₹600 Cr₹300 Cr₹300 Cr
Zenith Software Ltd₹600 Cr₹50 Cr₹550 Cr

Same EBITDA, very different cash left after capital expenditure.

It ignores working capital

Working capital is the money tied up in day-to-day operations: stock waiting to be sold, and bills customers have not yet paid, minus what the company still owes suppliers. If working capital grows, cash gets absorbed — yet EBITDA does not show it. We explore this fully in the next chapter.

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.
Two companies can look identical on EV/EBITDA and behave very differently once capex and working capital are considered. Use the multiple to start a comparison, never to end one.
Measures that account for capex and cash generation, such as free cash flow, often tell a more complete story. EV/EBITDA is a first filter, not the final word.
A company that must spend most of its EBITDA just to keep running is not as healthy as its multiple suggests. Always ask what happens after capex and working capital.

Key takeaways

  • EBITDA ignores capital expenditure, which can be very large.
  • EBITDA also ignores changes in working capital, which tie up cash.
  • Two companies with identical EV/EBITDA can need very different cash.
  • Use EV/EBITDA as a first filter, and look beyond it before drawing conclusions.

Check your understanding

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

Question 1 / 40%

Company A has EBITDA ₹600 Cr and capex ₹300 Cr. Company B has EBITDA ₹600 Cr and capex ₹50 Cr. What are their EBITDA-minus-capex figures?

How was this lesson?

Ratings are tied to your account so we can tell which lessons land well. Sign in to leave one — it takes a second.

Sign in to rate