V06: EV/EBITDA — how to analyse it

EV/EBITDA is the analyst's favourite. It compares companies regardless of how they are financed (liabilities vs equity). Two companies with the same P/E can have different EV/EBITDA because of different debt loads.

This is V06 — EV/EBITDA in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a collection of stories. In this article you get the variable explained, how to compute it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

EV/EBITDA was developed during the 1980s LBO boom in the USA. Buyers like Kohlberg Kravis Roberts (KKR) needed a metric that could compare companies with different debt loads — P/E did not work when the buyer was to take over large liabilities. EBITDA became the standard measure of 'operating earnings' and EV of 'the total price'. John Malone (Liberty Media) and Ted Turner popularised EBITDA for media companies because of their large depreciation on transmission equipment. In the 1990s EV/EBITDA became mainstream in M&A valuation. In the dot-com era (1995-2000) EV/EBITDA was overused — companies with negative EBITDA were valued at EV/Revenue 100+. After the crash of 2000-2002 the market returned to more cautious use.

What EV/EBITDA is and why it is the analyst's favourite

EV/EBITDA in brief EV/EBITDA is enterprise value (EV) divided by EBITDA. EV is the company's total value — market value on the stocks PLUS liabilities MINUS cash. EBITDA is the operating profit before interest rate, tax, and depreciation — operating earnings. EV/EBITDA answers the question: 'If I bought the WHOLE company (incl. liabilities), how many years of operating earnings am I paying?'. Unlike P/E, EV/EBITDA ignores capital structure — two companies with the same operations but different debt loads can be compared directly. This is why it is the analyst's favourite in M&A, private equity, and cross-industry comparison. The AKM1 scale: EV/EBITDA < 5 = score 5; 5-8 = score 4; 8-15 = score 3; 15-25 = score 2; > 25 = score 1. 📖 DEFINITION EV/EBITDA = Enterprise value / EBITDA. EV = Market value + Interest-bearing debt - Cash (incl. short-term placements). EBITDA = Operating profit + Depreciation. Measured as a multiple (times). Why EV/EBITDA beats P/E P/E has three weaknesses that EV/EBITDA solves. First: P/E ignores liabilities.

Computing and interpreting EV/EBITDA in practice

Find EBITDA in the annual report EBITDA is not always directly in the income statement — you must compute it. Three ways. Way 1 (standard): EBITDA = Operating profit (EBIT) + Depreciation. Fetch EBIT from the income statement line 'Operating profit' (or 'Result before financial items'). Fetch depreciation from the cash flow statement (line 'Depreciation tangible assets' + 'Depreciation intangible assets'). Add. Way 2 (alternative): EBITDA = Profit before tax + Interest costs + Depreciation. Fetch profit before tax from the bottom of the income statement (before-tax line). Add interest costs (financial costs minus financial revenue). Add depreciation. Way 3 (if the company reports): some companies, especially public tech companies, report 'EBITDA' directly in the interim report or the CEO's word. Read note 'Depreciation' or 'Financial items' to verify.

EV/EBITDA traps — hidden risks

EV/EBITDA for capital-intensive companies — the danger EV/EBITDA is dangerous for capital-intensive companies (telecom, industry with factories, retail with stores, shipping). The problem: EBITDA adds back depreciation that constitutes REAL costs — machines wear out and must be replaced. A telecom company with EBITDA 1 000 MSEK and CAPEX 800 MSEK has FCF of only 200 MSEK. EV/EBITDA 6 based on EBITDA 1 000 looks 'cheap'; EV/FCF 30 based on FCF 200 shows it is expensive. This is Buffett's criticism: 'EBITDA is one of the worst things — it allows companies to look profitable when they're barely covering their capital needs.' For capital-intensive companies, use EV/EBITDA - CAPEX (= EV/EBITDA - Capex/EBITDA) or EV/FCF.

Three perspectives on EV/EBITDA

Peter Lynch: Lynch rarely used EV/EBITDA — he preferred P/E and free cash flow. He warned that EBITDA hides capital intensity: 'A company that must invest half its EBITDA in machines every year is not worth the same as a company that does not need to.' Lynch preferred 'owner earnings' (Buffett's term) = free cash flow.

Benjamin Graham: Graham did not use EV/EBITDA (the multiple was popularised in the 1980s, after his time). He preferred P/E and earning power. Graham's rule: 'A company is worth at most 15x average earnings over a business cycle.' He adjusted P/E downward for cyclical companies.

AK1's interpretation: AKM1 weight 6%. EV/EBITDA is the most complete valuation multiple because it adjusts for liabilities, cash and capital structure. We combine EV/EBITDA with V10 (debt load) — a company with low EV/EBITDA but high debt is a value trap. AKM1 normalises EBITDA over a cycle to avoid cyclical surprises.

Go deeper

Triangulation, sum-of-parts, and FCF control

Want to practise with worked examples, chapter by chapter? The course EV/EBITDA (V06) contains 6 chapters, Lynch and Graham perspectives and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What is EV/EBITDA and what does the multiple measure?

EV/EBITDA sätter bolagets företagsvärde (EV) i relation till driftsinlönen (EBITDA). EV är marknadsvärdet på aktierna plus räntebärande skulder minus kassa, och EBITDA är rörelseresultatet före ränta, skatt och avskrivningar. Multiplen besvarar frågan: hur många års driftsinlönen betalar den som köper hela bolaget, skulder inklusive? Vill du öva steg för steg finns kursen EV/EBITDA (V06).

How do I calculate EV/EBITDA myself?

Börja med EV: aktiekurs gånger antal aktier, plus räntebärande skulder, minus kassa och korta placeringar. Räkna sedan fram EBITDA som rörelseresultat plus avskrivningar — avskrivningarna hittar du i kassaflödesanalysen. Dividera EV med EBITDA så får du multiplen uttryckt i gångår. Artikeln ovan går igenom metoden med konkreta rader ur årsredovisningen.

Why use EV/EBITDA instead of P/E?

P/E ser bara till aktierna och ignorerar skulder — två bolag med samma P/E kan bära helt olika skuldbörda. EV/EBITDA jämför bolag oavsett kapitalstruktur, vilket gör multiplen vanlig vid företagsköp och jämförelser mellan branscher. Kom ihåg att multiplen är ett jämförelsemått i utbildningssyfte, inte en rekommendation.

What misconceptions are common about EV/EBITDA?

Det vanligaste är att tro att lågt alltid är billigt. För kapitalintensiva bolag lägger EBITDA tillbaka avskrivningar som är verkliga kostnader — maskiner slits ut och måste ersättas — så multiplen kan se låg ut samtidigt som det fria kassaflödet är svagt. Ett lågt EV/EBITDA tillsammans med hög skuld kan dessutom vara en värdefälla, därför kombineras variabeln i AKM1 med skuldsättningsmått.

This is educational financial analysis, not investment advice.