EV/EBITDA

EV/EBITDA in brief

📖 DEFINITION

EV/EBITDA = Enterprise Value / EBITDA. EV = Market value + Interest-bearing debt - Cash (incl. short-term investments). EBITDA = Operating profit + Depreciation. Measured as a multiple (years).

Why EV/EBITDA trumps P/E

P/E has three weaknesses that EV/EBITDA solves. First: P/E ignores debt. Two companies with the same profit can have different debt levels. Company A: profit 100 MSEK, zero debt, market value 1 500 MSEK → P/E 15. Company B: profit 100 MSEK, 1 000 MSEK debt, market value 1 500 MSEK → P/E 15 (the same!). But Company B is more expensive if you count the whole company's value: EV = 1 500 + 1 000 = 2 500 MSEK vs Company A EV = 1 500. EV/EBITDA shows this. Second: P/E is affected by tax rates and interest rates. Two companies with the same EBITDA but different interest rate costs (high vs low debt) get different profits — and thus different P/E, despite identical operations. EV/EBITDA is independent of this. Third: P/E does not work for companies with small or negative profits. EV/EBITDA works better — EBITDA is almost always positive even when profit is negative. Conclusion: P/E is for the 'equity story', EV/EBITDA is for the 'enterprise story'. Professional analysts use both, but EV/EBITDA primarily.

💡 INSIGHT

EV/EBITDA is capital structure neutral — enables comparison between companies with different debt levels. P/E can misleadingly show 'cheap' for indebted companies and 'expensive' for debt-free ones.

How to calculate EV — step by step

EV calculation in five steps. Step 1: Market value = share price × diluted number of stocks. Take from stock exchange data. Step 2: Interest-bearing debt. Take from the balance sheet's 'Long-term liabilities' — includes bank loans, bonds, leasing (since IFRS 16), and convertible debt. Count ALL interest-bearing liabilities, not only long-term ones. Step 3: Cash and short-term investments. Take from the balance sheet's current assets. Include short-term investments (which are close to cash) but not long-term securities. Step 4: Minority interest. Add the minority share in subsidiaries — this is also capital that must be paid for. Step 5: EV = Market value + Interest-bearing debt - Cash + Minority interest. Example: Atlas Copco 2023 — Market value 63 500 MSEK + Debt 12 000 MSEK - Cash 18 000 MSEK + Minority 1 500 MSEK = EV 59 000 MSEK. EBITDA 2023 = ~36 000 MSEK (Operating profit ~28 000 + Depreciation ~8 000). EV/EBITDA = 59 000 / 36 000 = 1,64. (Note: Atlas Copco is exceptional — see case study.)

✓ TIP

Since IFRS 16 (2019) companies must capitalize leasing in the balance sheet — this increases both 'liabilities' and 'assets'. Include leasing in interest-bearing debt for EV. Some companies report 'adjusted EV' excluding leasing — be consistent in comparisons.

⚡ KEY INSIGHTS EV/EBITDA = Enterprise Value / EBITDA — the analyst's favourite EV = Market value + Debt - Cash + Minority interest Capital structure neutral — enables comparison regardless of debt level Works better than P/E for companies with small/negative profits 2

EBITDA — what it is and what it is not

📖 DEFINITION

EBITDA = Operating profit + Depreciation. Alternatively: Profit before tax + Interest costs + Depreciation. Measures the operating paycheck independent of financial structure, tax, and depreciation policy.

EBITDA margin and EV/EBITDA interpretation

EV/EBITDA must be interpreted together with the EBITDA margin (EBITDA / revenue). Two companies with EV/EBITDA 10 can have fundamentally different profitability. Company A: EV/EBITDA 10, EBITDA margin 30% — premium company, buy if EV/EBITDA < 12. Company B: EV/EBITDA 10, EBITDA margin 5% — commodity company, buy if EV/EBITDA < 6. Rule of thumb: EV/EBITDA / EBITDA margin should be below 0,5 to be cheap. Company A: 10/30 = 0,33 (cheap). Company B: 10/5 = 2,0 (expensive). Further: the trend in the EBITDA margin matters more than the level. A rising margin (5% → 8% → 12%) indicates operating leverage — the company becomes more profitable as it grows. A falling margin (15% → 12% → 8%) indicates competition or cost problems. Finally: EBITDA per employee or per unit gives productivity measures. Atlas Copco has very high EBITDA per employee (~700k SEK) because of its service business with high marginal profitability.

✓ TIP

Use 'EV/EBITDA / EBITDA margin' as a combined valuation multiple. Below 0,5 = cheap; 0,5-1,0 = normal; above 1,0 = expensive. This correlates margin and valuation — more truthful than EV/EBITDA alone.

EBITDA vs EBIT vs FCF — which should I use?

⚠️ WARNING

For capital-intensive companies (telecom, industry, retail) EV/EBITDA can show 'cheap' while EV/FCF shows 'expensive'. Buffett's criticism of EBITDA is based on this: depreciation is a REAL cost (machines wear out).

⚡ KEY INSIGHTS EBITDA = Operating profit + Depreciation — the operating paycheck EV/EBITDA / EBITDA margin < 0,5 = cheap; > 1,0 = expensive EBITDA best for capital-light companies (SaaS, services); EBIT/FCF for capital-intensive ones Buffett criticizes EBITDA: 'ignores depreciation, which is a real cost' 3